You can make a nice living by buying higher lows on the re-test. It's called the "W" or "1-2-3" bottoming pattern. Also, find out about the chart pattern that forecast the 400 point DOW up move April 18th, 2001. This is the same chart pattern that has occurred 27 times since the S&P began trading. In each instance, short-term traders were able to take quick profits. Just learn this stock trading tips and tricks:
The most accurate way to determine the overall strength of the market is to monitor the NYSE New Lows. The NYSE New Lows number will tell you exactly how strong the market is at given time. You can get the NYSE New Lows number from big charts.com, Investors Business Daily, and USA Today.
Sell your shares the instant they fall a penny. Then buy on an uptick and hold the stock until the price drops again. The key here is to not hold on to a losing stock. It sounds obvious, but it seems to run against human nature. Selling a stock when it starts to fall requires more discipline than you might imagine.
HEAD AND SHOULDERS
This pattern reflects extended distribution of shares.
This pattern, and 50% retracement, are the most reliable reversal patterns there are in technical analysis. This pattern indicates that shares are being sold by those who bought the stock at lower levels - perhaps when it was basing. The minimum downside measuring implication of this pattern is obtained by measuring from the neckline to the tip of the head, and then projecting this distance down from the neckline.
After forming the head, which can be double by the way, price corrects back to initial support, rallies but then rolls over, forming the right shoulder of the pattern. When price falls through the neckline, that zone reverses roles from support to resistance as traders, fearful of giving back profits or wanting to cut losses, sell into strength.
VOLUME
The peak, or head, of the "Head and Shoulders" pattern is not confirmed by either momentum or volume, an indication that buying demand is falling off. Following the formation of the H&S pattern, price rallies not accompanied by a pickup in volume indicate that accumulation of shares is not taking place. Many rallies into falling moving averages are knocked over by the 40-day or its 80-day counterpart, suggesting that the stock is at risk of retesting lower levels.
If volume surges as price drops, this is bearish. If volume drops as price surges, this is also bearish. This represents non-confirmation of price by volume - i.e., dwindling buying - and is followed by a pullback.
DOUBLE TOPS AND BOTTOMS
This is a reversal pattern. The advance that follows a rally and reaction fails to take the price significantly above the previous rally high. If the second peak does top out well above its predecessor, then the double-top call is invalidated. Assuming we have a legitimate double-top formation in place, the price then subsequently retreats below the previous low, signaling a trend reversal. In terms of spotting a valid double top, it doesn’t matter where the second top develops; it can be a little above the first, a bit below or at the same level. Also, volume on the second peak is substantially lower than that of the first. This denotes buyers’ lack of interest and makes the price more vulnerable should sellers persist. What is happening with a double top is a reversal in the rising peaks and troughs.
A double bottom is the exact opposite. It is pretty much the same thing happening but here you have two reactions developing at around the same level and a rally on strong volume (indicating aggressive buyers) that takes the price above the previous peak – in between the two bottoms. The first leg of the double-bottom formation usually occurs on heavy volume. The second leg down is typically characterized by lighter volume. An air of bearishness sets in as traders get disappointed in seeing the initial rally of the first low all but retraced in the second swing down to the second bottom of the formation. For a valid breakout to occur, volume has to expand as complacency at the second bottom is replaced by enthusiastic buying and the price breaks out beyond the high point between the two bottoms.
THE THREE-DAY CYCLE
This contrarian pattern works for day traders and position traders alike. I'd put on my conspiracy hat and say that the market is “engineered” from within. The three consecutive cycle days are: the “
Buy Day”, the “
Sell Day”, and the “
Short Sale Day”. On the “Buy Day”, the market opens near or at its low prior to a price rally. The market is selling off as the uninformed sellers sell to the smart-money buyers. In effect, the market is taken down to create selling. Often, the overnight stops will be hit and buying absorbs the sell-off. When selling subsides, the market is ready to rally as new buying enters the market.
On the “Sell Day”, the long positions acquired on the “Buy Day” are sold at or near the previous day’s high. What is happening here is nothing more than smart money taking profits where resistance exists. One would think that the market would now decline – but first it is “engineered” higher. On the “Short Sale Day”, the market opens higher and rallies. But the rally is short-lived, and soon after the market declines, closing near its lows. The appearance of strength has fooled the buyers. After the three-day cycle, the buying strength has dissipated, and lower prices become the path of least resistance. Once again, the smart money is on the right side, selling near the highs.
This pattern appears again and again - only to disappear, and then reappear once again. It may be consistent for four or five weeks and then disappear. It is most consistent in markets that are not trending.
WATCH THE OPEN
Often, the market will tell you what its direction will be. A strong signal is a sharp break or rally shortly after the open. All you have to do is wait for the market to tips its hand. You simply wait for a pullback (in the case of a rally) or a rally (in the case of a break) to make your move. Typically, this signal will be short and fast.
Late day momentum in a particular stock, commodity, currency or the overall market typically carries over into the first part of the next day. Watch the close for a good idea of the next day's open.
INSIDE BARS
1. This pattern should be preceded by a sharp up or down price move. The formation of inside bars without a preceding strong trend generally does not signal a sudden balancing of supply and demand.
2. The trading range of the first bar should be wide by previous standards. This confirms the strong underlying momentum of the prevailing trend.
3. The trading range of the second bar should be much smaller than the first, which tells us the balance between buyers and sellers is much more evenly matched and the balance is tipping. The sharper the contrast between the two bars, the greater the potential for a reversal.
KEY REVERSAL BARS
1. Develops after a prolonged rally or reaction. Often, this trend will be accelerating by the time the price experiences the key reversal bar.
2. The price opens strongly in the direction of the prevailing trend – above the previous close.
3. The trading range is very wide.
4. The price closes near or below the previous close. A classic reversal finishes below the previous bar’s low.
5. Volume should be climactic on the key reversal bar.
6. The upper end of the bar sticks out like a sore thumb above the previous two sessions. The price breaks out strongly to the upside but is unable to hold its gains, and by the close it gives up ground over the previous period.
7. Alternatively, the price opens close to its low and closes higher, in the opposite direction of the prevailing trend.
8. The extremely high volume is the tipoff that either buyers or sellers are exhausted and the next trend is likely to be down or up.
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