Bullish Chart Patterns

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Look at Figure 4.4. Note at point A the rounded bottom and the

steady trend up to resistance. At point B, you will see a breakout

above resistance, with the close above the resistance line. Look for

an improvement in a one-minute momentum indicator and possibly

an increase in volume. If you enter at point B, you would place a

stop at point C. If the uptrend reverses, it is likely to retest support.

By placing your exit point below what has now become support at

point C, your chances of not being stopped out prematurely are

greatly improved. The longer the consolidation remains at resistance

before the breakout the better. As a point of interest in realtime

intraday chart work, you will find that, as a rule, the longer the

price remains at consolidation before the breakout, the stronger the

momentum of that breakout will be. The key is not to get impatient and make your move into the trade before the signal has occurred.

Time and time again I have witnessed traders who are action

addicts enter before the signal tells them to. The result is a loss on

a perfectly good trade. The only reason the trade failed is because

they were in a hurry. Successful traders are patient people—they let

the trade come to them. Success in short-term trading means waiting

and watching for the right moment. When it arrives, you take

instant action, but until then you calmly watch and wait. A highprobability,

profitability style of trading involves more concentration

and thinking than the frantic outbursts typical of a scalper.

Trading intraday trends is far more relaxed and enjoyable because

the trend lasts longer and there is more profit potential in trading a

trend than in trading increments of 1/16 or 1/8 of a point.

Figure 4.4 showed a retest of resistance. Let us look at a similar

intraday chart pattern that you will see quite often. In fact, it is the

first part of another pattern that most traders trade every day without

realizing that two parts make up this pattern. The first part is

the rise to meet resistance.

Take a look at Figure 4.5. Point A shows the rise of price to

resistance. Note that resistance was penetrated slightly and then

began to consolidate below resistance. This is an important factor

for you to key in on. The arrow at point B shows a tight, narrow

high-to-low price range. The longer the time frame of this range the

better. There is a high probability of price breaking out above resistance.

Do not enter the trade until the breakout occurs. You can lose a lot of money by anticipating the trend and taking the trade early.

Do not guess the direction of trend. When it reveals itself, then make

your move and enter the trade. The rise to meet resistance is part of

a high-probability chart pattern known as the trending breakout of

consolidation. Do not confuse this pattern with an ascending triangle

formation.

The rise to resistance many times is the first step to a trending

breakout of consolidation. This is a very powerful and frequently

seen intraday bullish chart pattern. It occurs in stocks that have

strong trending potential. This pattern can last for a long period of

time. It can rise several times and is a much safer pattern to trade

than a price trend that shows a parabolic pattern. When a parabolic

run occurs, you are expecting a retracement of price, which can be

as much as 50 percent. But the trending breakout consolidates two

or three times, allowing the bullish momentum to keep exploding

upward without exhausting itself. Look at Figure 4.6. Point A and B

show the breakout of consolidation. Also note the overall trend is

up, as each consolidation is higher than the last. I have found this to

be a very profitable chart pattern to trade. Remember two factors

when trading this pattern. First, when price consolidates, be ready

for a reversal to the downside, and second, watch the clock. It has

been my experience that if this pattern enters the grinder (middle of

the day), the consolidations have a much greater probability of breaking down and not continuing upward. This price pattern is one

of the longest of the bullish patterns and can continue for one or two

hours. The average time for this pattern is between 30 and 45 minutes.

Let us examine several other bullish intraday price patterns.

Ascending triangles work in real time when they are more compressed.

Examine Figure 4.7. The letter A shows the breakout of the

triangle formation to the upside. If the triangle is not compressed,

then the resistance line will most likely hold and price will turn

down. Always check momentum and look at the price lows. Ask

yourself, Are the lows rising or beginning to trade lower? If they are

rising, then there is a good probability that the price will break out

to the upside.

At point B in Figure 4.7, note that the high-low range is starting

to compress even further. This could indicate that momentum is

beginning to slow down. At this point you must wait to see which way price will move. In daily price patterns, an ascending triangle is very

bullish. This is not the case with intraday ascending triangles. The

more compressed the triangle, the greater the upside breakout. If you

do not have the compression, and if you see compression of the highlow

range identified by letter B, this pattern will be bearish, not bullish.

This information is contrary to what most traders believe to be

true. The difference is in the detailed analysis of the pattern, which

you now know and understand. From now on, when you see an intraday

ascending triangle, do not just assume it is bullish until you

examine the points I have outlined.

Figure 4.8 shows what the bullish pattern looks like. In a realtime

five-minute chart, if the pattern is wider at the base than this,

it will show strong resistance, and price will usually not break out

without strong buying volume. The ascending triangle patterns that

work best can be visually described as a wind sock or cone shape

with a flat top. Figure 4.8 is a visual example of the shape I am

describing.

Be careful not to mistake a tight consolidation pattern with a

compressed triangle formation. Many times, new traders (and some

times even experienced traders) will make this error. If you have

any reservations, use the figures in this chapter to help you identify

the correct price patterns. Do not guess. Guessing is hazardous to

your wealth.

Extremely volatile stocks will have a massive sell-off once or

twice during the trading day. This intraday sell-off can become an

excellent point at which to short the stock, making this strong downward

move a bullish trend you will want to take advantage of. When

this trend begins to correct, a climax selling reversal can be played

by taking a profit on your short position and, at the right moment,

going long (buying the stock). The key to identifying this reversal of

trend is a series of points I have outlined in Figure 4.9.

First you need a protracted downward sell-off intraday from an

overbought condition. Then you need the following factors in the

order in which I have identified them to occur. Price bars A and B

show a slowing of a major sell-off. Note how the lows are closer

together and the high-low range of bar B is less than that of bar A.

Bar C shows a smaller high-low price range than price bar B. Point

D shows price reversing direction. The important thing to note here

is that the low of D is at the previous high of C. This is highlighted

by the downward arrow pointing to the dotted line. This line is

showing the high of bar C, which is equal to the low of bar D. The

low and high of bar E are higher than the low and high of bar D.

Another factor important to the continuation of the trend reversal:

From bars C to F, the closes are higher and you begin to see a trend

of higher highs and higher lows. I have traded this pattern many

times and found it to be profitable. Most of the money comes from

the short side of the trade. The long side usually will rise 20 to 30

percent of the decline, but it will typically take twice as long to rebound as it did to fall. This is because markets and stocks will

generally fall 67 percent faster than they rise. The key to the reversal

is understanding factors A through F. Once you know this information,

you can add this pattern to your trading kit.

The oversold extreme reversal is a pattern that you will see

many times. This pattern is especially prominent in technology

stocks, which are prone to a large degree of speculation. This speculation

results in massive volatility, and in most cases buying and

selling reach points of extreme. The key to this pattern is identified

by bars A and B in Figure 4.10. Bar A shows a large high-low range

and a close toward the top part of the bar. Bar A is an extreme point

of an oversold condition. If you remember basic statistics, think of

bar A as being well outside the normal distribution of a set of numbers.

Even though the trend is down, looking at Figure 4.10 you can

see it is an extreme point. Bar A has an intraday close above the

midline of the bar and toward the high of the bar. The midline is repa resented by the dotted line in Figure 4.10. Bar B is important in

determining if the trend is reversing. Bar B is the very next bar, and

it is above the high of bar A. Bar B is also trending higher and will

have an intraday close toward the top of the range. In some cases

you will have a gap up, as in Figure 4.10.

An open trend run is best described as a stock that has massive

upward or downward momentum from the opening of the day.

This momentum usually continues for 25 to 30 minutes. In most

cases, the markets are also trending strongly in the direction of the

stock. Identifying an open trend run begins with the first five-minute

bar in Figure 4.11 (bar A). From the open, you have higher highs and

higher lows. The lows stay above a 7- and a 17-period exponential

moving average. You enter open trend runs early in the trend, using

the low of the first opening bar as your exit point. When the stock

begins to consolidate, or it puts in a parabolic run at the end of an

extended move, you can take your profit. Letter B shows price starting

to consolidate and lose momentum. This would be an excellent

place to take your profit. You could draw a support line like the one

in Figure 4.11, and if the stocks drop 1/8 or 1/4 point below that support

line on a five-minute bar, you sell. In some cases, the open trend run will turn into a consolidation and then trend higher. Once consolidation

begins, momentum slows down and you have two decisions

to make. Sell, or wait for momentum to resume and trend higher. If

momentum does not resume, sell when it breaks the support line.

In Figure 4.12, day 4 shows the inside day. An inside day is inside

the high and low range of day 3, and the dotted lines show this

relationship. Once a stock begins to move, usually it will move for

three to five days in one direction if the momentum is strong

enough. A breakout above a 12-day exponential moving average

with the close toward the high of the day is usually enough to drive

the stock for three days or more. The fourth day is critical to the

buy or sell decision. If the fourth day looks like it will close lower,

then you will sell. This is especially true if the day opens with all the

trading below the open, and the close in all probability will be at or

near the low. If this is reversed, then the day 5 may be higher than

day 3. If day 5 is a Friday, you should probably sell or place a stop at

the low of day 4. Going into a weekend with a large position is never

a good idea without placing a stop.