Thursday, December 3, 2009

Recognizing Trading Patterns

It is important to be familiar with patterns in order to time your entries and to understand a stock's price action. In this example from Wednesday's trading session we see CTRP form a bull flag. Here we see a green candle followed by three inside red bars. The inside bars form the flag and a green candle following the inside bars that closes above the inside bars confirmed that there would be a continuation move higher.

In this example of the SPY chart of today and yesterday's session we some more patterns that can help us understand the price action. In the first box we see a failed bull flag. A lot of times the biggest moves come from failed patterns. Within that sell off a bear flag pattern formed and we got our confirmation candle close below the three up inside bars which led to taking the markets to the lows of day. In today's action we see a larger bear pattern form over several candles. Here we see the initial up move off the open followed by strong selling. For the remainder of the session we traded in a sideways and slightly up formation that could not retrace the move down. This formed a slightly rising "L" pattern which is very bearish. When the selling began, a candle closing below the morning lows confirmed the pattern which caused a sell off into the close.

In this example of the SPY daily chart we see the well publicized head and shoulders pattern form and fail which led to a major move in the opposite direction. The pattern was in play when we got a confirmation close below the neckline, but it did not play out. The pattern became negated once the stock recaptured and closed above the neckline. The pattern failed and a big move followed as soon as the stock took out its right shoulder.

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