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The Traders Wheel
7/4/98 by Alan Farley

Breakout Roots 

As stocks push toward uncharted territory, skilled traders can examine the impending new high breakout through existing features within the chart pattern. Final phases of congestion often print sharp initiation points for the breakout impulse. Locate this hidden root structure in double bottom lows embedded within the congestion, just prior to the trend move. The distance between these lows and the top resistance boundary will yield price targets for the subsequent rally. Barring larger forces, this new high breakout should extend no more than 1.38 times the distance between that low and the resistance top before establishing a new range.

Once a new high base is finally cleared, the bull impulse escapes the gravity of final congestion. This often triggers a dramatic 3rd wave for the trend initiated at the congestion low. This thrust can easily exceed initial price targets when it converges with larger scale wave movement. In other words, when forces in the daily and intraday charts move into synergy, trend movement will inevitably be more dramatic than anticipated.

Measure the ongoing new highs with a MACD Histogram or other widely used momentum indicator. Whatever your choice, allow your math to support the pattern rather than the other way around. For example, if an established trendline can be drawn under critical lows, your trade timing should be keyed off that line rather than waiting for your indicator slope to turn up or down.

Effective trading of post-gravity impulses relies on the interaction between current price and your momentum indicator. At new highs, prior support/resistance can't be used to predict swings. Follow the MACD slope to flag overbought conditions favorable for the development of ranges or reversals. Enter long positions when price falls but the slope begins to rise. Or be conservative and wait for the zero line to be crossed from below to above.

Patterns point to low risk momentum entry. Retracements to a trendline or moving average identify profit opportunities. Follow this strategy and you’ll parallel the most successful investment method of this entire bull market: buying the dips. It works because each price dip brings in new buyers who missed the last opportunity. Not exactly rocket science but it gets the job done.

Short sale swings should be avoided completely when momentum is high unless you’re a highly experienced trader. Trying to pick tops is a loser's game. Most traders can delay short sales until momentum drops sharply but price is high within its range. Pattern analysis can then locate favorable countertrend entry points with limited risk.

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Traders can take long positions any time momentum is high as long as tight stops and rigid discipline limit losses. One ideal chart pattern will exhibit accelerating price movement with expanding price bars and volume. Combine this with rising MACD spikes and you’ve found a profitable entry strategy. Or look for this dynamic state through the spreading width between short and long averages on Moving Average Rainbows.

 

 
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

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