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The Traders Wheel
5/23/98 by Alan Farley

Pattern Landscape

When you look at a stock chart, can you find where buyers or sellers will likely upset the current trend? If not, you’re missing many high profit opportunities. Past battles between bulls and bears leave a scarred landscape of unique charting features. When trend finally turns back through old price, skilled traders use these powerful points to identify effective momentum and swing trades.

Gaps mark the most obvious element of a pattern landscape. They also provide one of the most profitable setups in all of technical analysis. Continuation gaps rarely get taken out on the first try, except by another gap. Successful trade entry in the direction of support can often be executed as soon as price enters a gap on high volatility. Day traders use this tendency profitably since major reverse gaps rarely occur intraday. Gaps mark the most obvious element of a pattern landscape. They also provide one of the most profitable setups in all of technical analysis. Continuation gaps rarely get taken out on the first try, except by another gap. Successful trade entry in the direction of support can often be executed as soon as price enters a gap on high volatility. Day traders use this tendency profitably since major reverse gaps rarely occur intraday.

Past congestion breakdown identifies short sale entry points. The more violent the break, the more likely it will resist penetration. Head and Shoulders, Rectangles and Double Tops leave their mark with strong resistance levels. These patterns often print multiple doji and hammer lows prior to a final break as insiders clean out stops at the extremes of the pattern. Fallen trend that returns to the range of these candles offers low risk entry as price bounces off resistance.

Clear Air prints a series of wide range bars as price jumps (or plummets) from one stable level to another. Rapid price movement tends to repeat each time that a trend enters its boundaries. Potential reward spikes sharply through these unique zones. But watch out. Sudden reversals tend to be sharp and vertical as well. Tight stops are advised. Clear Air prints a series of wide range bars as price jumps (or plummets) from one stable level to another. Rapid price movement tends to repeat each time that a trend enters its boundaries. Potential reward spikes sharply through these unique zones. But watch out. Sudden reversals tend to be sharp and vertical as well. Tight stops are advised. Clear Air prints a series of wide range bars as price jumps (or plummets) from one stable level to another. Rapid price movement tends to repeat each time that a trend enters its boundaries. Potential reward spikes sharply through these unique zones. But watch out. Sudden reversals tend to be sharp and vertical as well. Tight stops are advised.

A complex landscape develops as price breaks into ranges where past multiple swings took place. Once new support is established, the odds favor more of the same. A Swing Range may exist for an extended period of time. The more durable a range was in the past, the longer this new swing range should persist before price finally surges into a new trend impulse. But be aware that other landscape features may suggest an earlier breakout from these profitable zones.

Pattern landscapes recognize that important features may not be horizontal. What the eye resolves as uptrend or downtrend contains multiple impulses shooting out in many directions. While these forces converge into visible trend, individual "trendlets" can often be traded. The most common of these is the Parallel Price Channel.

Past price action exerts a powerful influence on current movement. But trend development is a complex process, combining many divergent forces. It would be simplistic to assume that each impulse will stop right at the tick where it did last week or a year ago. Regardless, the skilled trader can often predict the influence of key past events on current price and execute profitable strategies using only the features of the landscape.

cpq99.gif (6251 bytes) Both upward and downward trendlets contribute to price movement at the same time. Trendlines or channels need not contain continuous impulses. Sometimes they will skip over several recrosses in a period of months or years, only to reassert themselves long after the technician concludes they no longer exist.

 

 
Article contributed by The HARD Right Edge, which presents highly original workshops, tutorials, strategies and resources on multi-trend technical analysis and and short term trading. Article reprinted here with permission, which presents highly original workshops, tutorials, strategies and resources on multi-trend technical analysis and and short term trading. Article reprinted here with permission.
 
 

 

 
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Last modified: April 02, 2001

Published By Tulips and Bears LLC