Navigating Uncertainty With Technical Analysis
Get ready to step up to the plate as we review a Homerun technical chart pattern that continues to set up and trigger during times of uncertainty. In my rigorous studies for the CMT exams, one thing was emphasized time and time again: our role as technicians is to react to price, not to make forecasts. Calling a “Top” or “Bottom” in the market is challenging. Tops often extend higher than anticipated, just as bottoms can surprise us by lingering in oversold territory longer than we could ever imagine. Today, we focus on the technical aspects of identifying and trading bottoming patterns. We’ll explore what to look for and how to take advantage of these opportunities!
The Recurring Theme of Bottoming Patterns (The Falling Wedge)
A recurring theme has emerged in the market lately as it bounces higher from its lows, repeatedly revealing the same technical chart pattern. Technical analysis teaches us that these patterns and setups tend to repeat themselves, providing an opportunity to create a rules-based system that anticipates the expected outcome. These explosive setups often arise during times of uncertainty when market pundits are distracted by breadth indicators, recession fears, and concerns about bank failures. We aim to filter out the noise and maintain an unwavering focus on price action. We refuse to let our worries talk us or others out of participating in a potentially life-changing setup or trend. The market is far more astute than any individual, constantly incorporating information by the second, long before it reaches the television screens of the talking heads. Furthermore, we firmly believe that it is the responsibility of professionals to identify outlier stocks that outperform the market rather than merely providing play-by-play commentary of what’s not working or making excuses for underperformance. Today we’ll be focusing on the falling wedge pattern.
The Falling Wedge: How to Spot and Trade this Bullish Pattern – CLICK HERE
Decoding Chart Patterns: Unveiling the Hidden Messages
One common occurrence that frequently repeats itself in bottoming patterns is accumulation volume. But what exactly is accumulation volume? It’s also known as institutional buying. Institutional investors, often called smart money, are the driving force behind this phenomenon. They don’t merely dabble with a few thousand dollars; they invest millions, and sometimes billions, in the companies they deem worthy. Their decisions are based on meticulous research and analysis.
When the smart money hits that buy button, their actions leave an unmistakable trail in the form of increased trading volume on that specific day. These institutional investors possess insights that are often beyond the reach of retail investors like us. Hence, when they demonstrate significant interest in a stock or company, it is imperative to pay close attention.
These savvy money investors, fondly referred to as whales in the iconic film “Wall Street” by Bud Fox, typically include prominent players such as hedge funds, mutual funds, pension funds, and renowned individuals like Warren Buffet. Brace yourself when they decide to enter a stock, as it is likely to experience substantial movement. The trading volume will also surge dramatically as they acquire significant portions of a company’s outstanding shares. Consequently, the stock price is inevitably driven up. Moreover, when institutional investors step in, it often leads to the stock rising and, in some cases, soaring over an extended period. As traders, they are the trend creators that we seek to ride like a skilled surfer gliding atop a massive wave.
What Should We Pay Attention to When Considering Accumulation Volume?
When identifying a falling wedge pattern, paying attention to volume characteristics can offer valuable insights into the trend’s strength and potential for a reversal. In the case of a bottoming pattern, a high volume during the initial downtrend signals intense selling pressure and a bearish sentiment among traders and investors. Similarly, in a continuation pattern, a high volume during the initial uptrend indicates the legitimacy of the upward movement. The volume typically decreases as the stock reaches a support level and enters a consolidation phase, resulting in a tight trading range. This volume decline suggests indecision, where buyers and sellers are balanced, and the stock consolidates.
During the falling wedge pattern formation, it’s essential to watch for a decrease in trading volume as the stock consolidates within the narrow trading range. This decrease in volume indicates a potential reduction in selling pressure and a possible shift in favor of buyers taking control.
As the stock approaches a potential reversal point, keep an eye out for an increase in volume. A notable surge in volume as the stock nears the support level suggests buyers are becoming more assertive, raising the likelihood of a reversal. This surge in volume confirms the trend’s strength and enhances the trade’s chances of success.
In today’s examples, I will highlight the volume by price bars as they appear on the weekly timeframe, revealing significant accumulation within the pattern (Volume by price, or volume at price bars, displayed on the left side of the chart, provide a visual representation of the trading volume that occurred at specific price levels).
Riding the Wave: Upside Momentum and a Basic Trend Following System
One of the crucial factors in a successful trading plan is getting the signal right. If you misinterpret the signal, you will likely face frequent losses or be on the wrong side of the trade. That’s why entering a stock with a high-probability setup and a clear expected outcome holds immense significance. Without this, you may end up experiencing losses because the stock fails to break out, or you may find yourself caught in a turbulent market with no clear direction. As the old saying goes, “Death by a thousand papercuts,” I still witness traders suffering from this slow demise, even during an up-trending market.
Once you receive the signal, it’s essential to implement a basic trend-following system that incorporates moving averages or a volatility stop as a trailing stop-loss order. It’s important to acknowledge that this strategy won’t always be foolproof. Still, it can help filter out the noise and allow the market to work its course while disregarding all the distractions surrounding you. The most challenging part for many individuals is quieting their thoughts and refraining from impulsive actions.
I’ll use the 10-week or 50-day moving average for today’s demonstration purposes as a straightforward trailing stop.
Mastering Your Mind and Emotions in Trading: The Real Challenge – CLICK HERE
Technical Analysis: Your Secret Weapon
As numerous market pundits attempted to talk people out of participating in the market due to their fears and lack of understanding, we continued to pound the table on these stocks. These setups consistently appeared on momentum scans, one after another, with the same defining characteristics.
On March 13, 2023, we identified Microsoft in the Setups as it displayed significant price action. The stock retraced and tested the trendline breakout of a large falling wedge in the form of a bull flag continuation pattern. This indicated a possible continuation of the uptrend shortly, prompting traders to closely monitor the stock for a potential breakout to the upside. The presence of substantial volume by price bars within the pattern is worth noting, suggesting significant accumulation. Additionally, observe the rounded bottom formation or the gradual rounding of price leading up to the breakout. This bullish formation is frequently observed as the wedge progresses toward its apex before a breakout occurs.
Please note that we consistently highlighted these setups multiple times in the Daily Setups, as they continued to appear on momentum scans before the breakout and during the subsequent price movements.
Alphabet (GOOGL) appeared on the momentum scanner multiple times before the breakout, indicating a growing bullish momentum. The stock displayed a strong upward movement, breaking out from a significant falling wedge pattern and forming a rounded bottom, suggesting a potential bottoming base formation.
To demonstrate the effectiveness of moving averages in enhancing breakout probabilities, I incorporated the 50-day moving average and the 200-day moving average on the follow-up chart. It was encouraging to see the price action reclaim the 50-day moving average and steadily rise, eventually crossing above the 200-day moving average. This confirmed the strengthening trend.
As the price action accelerated higher from the moving average, it presented an opportunity to tighten the stop-loss and protect profits. There are various methods to achieve this, and you can explore different options in this blog article.
Feel free to check the blog article for more information on protecting profits and managing risk in such scenarios.
Navigating the Noise: A Simple Trading Plan to Follow – CLICK HERE
NVIDIA began to show promising signals on the momentum scanner on January 17, 2023. This setup was shared in the Setups section as the price action approached a horizontal resistance level, indicating a potential breakout opportunity. The recurring defining characteristics that consistently appear on the follow-up chart are worth noting.
First, we observe a significant falling wedge pattern, which is a bullish continuation pattern. Additionally, the presence of large volume by price bars suggests accumulation, indicating strong interest from buyers. Furthermore, we can identify a rounding of price or a bottoming base in the form of a rounded bottom pattern, which often precedes a breakout. Lastly, the price closely follows the 50-day moving average, providing support and confirming the stock’s upward momentum.
Similar to the movie Groundhog Day, AMD keeps appearing on the momentum scan results, and we consistently featured it in the Daily Setups. It felt like I was posting the pattern on repeat as the price action formed a setup that closely resembled the charts mentioned above, exhibiting the same defining characteristics.
As in the previous charts, AMD’s setup displayed a familiar pattern before the breakout, creating what I like to refer to as a “momentum run” or a “momentum trend.” This recurring pattern and behavior in the stock’s price action suggested the potential for a strong upward movement and a sustained trend.
By recognizing these consistent characteristics and utilizing technical analysis, we can identify high-probability setups and take advantage of the potential momentum and trend as demonstrated in these stocks.
TSLA showcased similar characteristics as we repeatedly shared its chart in the Setups, which appeared on momentum scans before the eventual breakout. To illustrate the efficacy of moving averages in improving breakout probabilities, this time, I included the 21-exponential moving average, the 50-day moving average, and the 200-day moving average on the follow-up chart.
Observing the price action, it is evident that once TSLA reclaimed the 21-exponential moving average, it proceeded to track along this moving average while surpassing the others, propelling the stock on a momentum run.
By incorporating these moving averages and monitoring their interactions with price action, we can enhance our ability to identify potential breakouts and take advantage of the resulting momentum in stocks.
Conclusion
We can uncover potential opportunities for upside momentum by focusing on technical chart patterns and setups during market volatility and uncertainty. It is essential to filter out the noise and stay focused on price action, refusing to let our fears hinder our participation in life-changing setups. Recognizing accumulation volume, understanding the role of institutional investors, and utilizing moving averages can provide valuable insights into potential reversals and breakouts. These recurring characteristics, such as falling wedge patterns, round bottoms, and the interaction with moving averages, offer opportunities to trade with higher probability outcomes. By staying vigilant and following the signals, we can navigate the market with a rules-based approach, allowing us to take advantage of the expected outcomes. So, let’s embrace the power of technical analysis and stay tuned for future setups that could unlock tremendous potential in the market.
And if you enjoyed reading this blog post, feel free to share it with a friend! But remember, whether you choose to share or not, the most important thing is to stay true to your convictions. Don’t be swayed by the talking pundits. Please educate yourself about their capabilities and limitations to identify and seize life-changing opportunities confidently.
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