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You Can't Become Rich In Your Pocket Until You Become Rich In Your Mind | ||||
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Shareholders buy and sell stocks for many different reasonsSIGNPOSTS Trends evolve according to cyclic buying and selling behavior that the chart bottles into price bars. Market crowds act through predictable herd instinct at key moments within price development. Signposts identify where this mass crowd behavior should exert itself. Divergent market forces emit nothing but noise the vast majority of the time. Patience requires waiting for major impulses to intersect. Noise reduces and signal emits strongly within these small crossroads. When more impulses enter this convergent zone, signal gets even louder and noise can cease completely. That ringing bell is the sound of profitable opportunity for the swing trader. The market tea leaves often require great skill to interpret. Fortunately, the swing trader can quickly evaluate each new setup by combining the right elements of trend and time. Signposts point to opportunity within the charting landscape. Double tops, gaps, and stage analysis join other 3D tools to awaken a complex world of market action. But it takes great skill to pick the right tools for each individual analysis. This challenge can intimidate novices, but the market never reveals its secrets the same way twice. While an arithmetic chart shows a weak trendline, the log version may support the trade with strong price channels. Volume study may provide the important key to one execution but be safely ignored on many others. Rising price may say rally when the Bollinger Bands say selloff. Swing traders must learn the specific applications of each individual resource and develop the intuition to examine the most promising setups with the right ones at precisely the right time. This vital process may appear complicated or confusing. Use the analogy of the traders’ toolbox. Just as a woodworker relies on many different saws to build a cabinet, swing traders must apply the right set of tools to build successful positions. While the woodworker uses some items daily, others fulfill a special purpose that arises infrequently. The swing trader looks at similar chart features each day but must pull up special resources to answer difficult questions. In the end both skilled craftsman know when and how to use each individual tool to create their final work of art. The charting landscape uncovers signposts through the convergence of two or more elements. This cross-verification (CV) process offers an objective method to determine the odds of success for any trade entry. CV power lies in this linear mechanism: the more intersecting points in a trade setup, the higher the trade probability. Study the landscape using the right tools to locate intersecting points within the evolving Pattern Cycle. At its core, this simple workflow sums up all the preparation and analysis required before the execution of a trade. The novice typically misses many signposts, while a skilled trader may only require price to uncover that market’s mysteries. Newer participants should rely upon checklists to ensure that their charts receive complete attention. Many software programs and online charting modules allow extensive customization. Use these tools to flip through many examination modes to find that needle in the trading haystack. Price gaps mark powerful single-point signposts. They expose hidden S/R barriers when properly placed within a trend. Gaps come in many varieties, and swing traders must drill themselves in their various incarnations to avoid bad decision-making when it matters most. For example, intraday traders use opening breakout gaps to pinpoint momentum entry and exhaustion gaps to sell short when price retraces to test them. Mixing the two leads to unfortunate results. . VOLUME AND THE PATTERN CYCLE Crowd action-reaction emits volume benchmarks at key price levels. Measure this unique past participation against current activity to determine the relative importance of fresh events. Regardless of holding period, watch these primary reference points when price returns to test key levels. But always examine volume within the proper context. A single bar’s narrow impact may lead to poor interpretation of that market’s underlying direction. Use volume history analysis to place the recent action into proper perspective within the recent trend. The intermediate daily time frame provides a common basis for volume moving average computation. The 50- or 60-day VMA contrasts prior crowd participation with the current action for all liquid stocks through all exchanges. Use this simple measurement as a central tendency tool that gauges the crowd’s emotional intensity in real-time. The crowd sends a significant signal when volume exceeds 150% of the daily average. If daily volume falls below 50% of the average, look for dull and directionless trading to characterize that market. Volume peaks and valleys occur naturally within normal price evolution. They also tend to alternate in a cyclical pattern that parallels trend-range axis phases. Compare price placement within that axis against volume’s central tendency deviation to identify impending feedback shifts. For example, expect lower than normal participation within extended range formations. When volume suddenly peaks well above average within these constricted zones, it often signals an imminent breakout into a new trend. Don’t be fooled by seasonal volume aberrations. January draws significant new cash into the markets as investors replenish mutual fund coffers. Summer trading limps through the lowest participation of the year. Insiders and institutions take off for the beaches during holiday markets throughout the year, leaving few movers and shakers on the scene. And options expiration triggers heavy position shifts the middle Friday of each month. ACCUMULATION-DISTRIBUTION Price movement generates through a value exchange between interested parties. As markets cycle through buying and selling pressure, transactions slowly reflect the willingness of participants to own stock at higher prices or dispose of it at lower prices. This poorly understood evolution defines an issue’s accumulation-distribution (acc-dis). Acc-dis evolves continuously and often travels a different path than price development. For this reason, avoid the tendency to expect volume spikes to translate immediately into sustainable momentum. Shareholders buy and sell stocks for many different reasons. Short-term crowds tend to focus much more on current price than long-term investors. They can also flip stocks very quickly. Institutions lack this retail liquidity and must build or eliminate large positions over a longer time frame. As the largest fish in the pond, their slow movement inhibits the sentiment evolution that drives other participants. This induces backfilling and testing of new trend movement. For example, watch how price swings back and forth repeatedly through a key emotional barrier (such as the 200-day moving average) while undergoing a long-term recovery from a bear market. Acc-dis may lead or lag price rate of change. Often one measure will pull sharply ahead and then wait patiently for the other to catch up before proceeding on another leg. Swing traders build predictive indicators to capture this mechanism and track divergence between these two primary forces. As the slower element, acc-dis tends to pull price toward it rather than the other way around. In these divergent conditions, look for reversals just after price strikes overbought or oversold levels. This tension assists trade analysis near tests of old highs and lows. These important zones respond better to acc-dis than other price levels. Both breakouts and breakdowns need crowd support to proceed. When a stock hits a new high, only significant participation will carry it higher. When a stock hits a new low, a fearful supply of sellers will generate further decline. For this reason, swing traders measure divergence near these extremes to choose whether to fade price or go with a momentum break. Expect a reversal as price barriers exert their influence if acc-dis indicators suggest weak participation. Avoid decision-making based on very short-term acc-dis readings. The true nature of accumulation or distribution often remains hidden from all but the insiders. Large players, such as institutions and mutual funds, don’t want to broadcast their intentions, for fear that the news will move the market before they complete their strategies. So they slowly unwind positions into strength or build them during weakness. This significant contrary activity clouds the interpretation and true meaning of short-term volume surges. The trading flow may align with neither accumulation nor distribution during quieter phases. In a mixed fashion, bulls and bears evenly disperse the lower daily volume. Stocks rise or fall on broader market conditions in this environment. Mundane events can sharply affect trend without the shareholder’s common voice. Try to avoid this noisy midrange between enthusiastic accumulation and fearful distribution when choosing short-term positions. The best swing trading stocks have a float over 10-million shares and daily volume over 2-million. Volume-based indicators work extremely well with this broad participation. But be aware that Nasdaq double counts transactions, once on the buy and once on the sell. This can distort elements of crowd behavior. And always avoid acc-dis in the analysis of thin issues. Large holders try to manipulate the public view of such stocks to build a rosy picture that benefits their own pocketbooks. TRENDS AND VOLUME Expect volume to increase in the direction of the primary trend. Look for higher volume on up bars than down bars as prices rise during rallies. Reverse this during selloffs. In uptrends, more volume on sell-offs than rallies generates divergence that may foretell an impending change in trend. In downtrends, divergence again signals when volume shrinks on sell-offs and rises on rallies. Volume can flash an early signal for an impending reversal when it deviates sharply from the VMA during an active trend. Declining directional volume suggests a loss of crowd interest. After awhile the stock may fall of its own weight. Alternatively, when volume peaks too sharply or quickly, it can short circuit and blow off movement in the prevailing price direction. These high-volume climax events wash out both buyers and sellers as efficiently as lack of interest. They often mark major tops or bottoms. Moderate volume supports underlying trends for long periods of time. It often reflects participation very close to the VMA with few spikes or valleys. The flow of enthusiasm or discouragement generates price change that feeds on itself and allows one group after another to toss coins into the wishing well. Look for this phasing action on log charts that print rhythmic 45° patterns with repeated pullbacks to short-term moving averages. New trends awaken with price or volume leading the emerging directional force. Better trading opportunities with fewer whipsaws appear if volume builds first. When crowd enthusiasm leads price, acc-dis should exert a strong pull on its twin. Like a coiled spring, price eventually snaps forward to relieve the tension. For obvious reasons, swing traders want to enter positions just before this happens. But precise timing can frustrate the most promising volume-based strategies. Acc-dis price divergence can persist for long periods without quick release. New breakouts depend on volume support. Subsequent trend survival requires that price and volume move into convergence very early after the move. As price thrusts into all-time highs or pretraveled TMs, current acc-dis must support the next move. Fresh price levels place hidden demands on volume. New high breakouts require ample participation as well as alignment between acc-dis and price. Breakouts into TM levels force volume to digest past supply and emotional scars. Divergence builds quickly and triggers sharp whipsaws when new participation at these levels can’t absorb the resistance. Volume often spikes well above short-term VMAs during major breakouts. Greed and fear drive participation as the crowd recognizes the active trend. Volume can quickly exceed historical levels and surge for many bars at new highs or lows. Both strong uptrends and downtrends display similar volume signatures. High participation prints sharp gaps at emotional trend peaks, while short pullbacks exhibit declining interest. Few wish to exit trend-following positions in this active environment. Swing traders watch closely for signs of a blow-off as trend advances. This important reversal reveals itself through volume that spikes well above recent action while related price bars expand and turn in failure. This climax event flags the end of the current trend and beginning for a new range period. Use candlestick patterns to quickly uncover these major reversals. Dark cloud cover, shooting star, and doji patterns all print frequently during blow-offs. The trend’s last phase reflects the most active crowd participation in a bull-bear cycle. This frantic action corresponds with Elliott’s fifth-wave parabolic activity and sets the stage for the ensuing climax burnout. Once the event occurs, volume again surges when price approaches these levels from above or below. Extremes that print during blow-offs take great participation to violate. For this reason, fade early pullbacks to these climax bars through classic swing tactics. The reversal odds remain very strong as long as volume dries up on the move back toward the high or low. |
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