Friday, March 21, 2014

TechniTrader Weekly Discussion for MetaStock: “Why Bottoming and Topping Formations are Changing”

MetaStock® SPRS Series - Week 163 – March 21, 2014 - MetaStock Spatial Pattern Recognition Skills Series written by Martha Stokes CMT

In the past few years technical analysis has undergone some significant changes.  Many traditional technical patterns are either not forming as often, not as reliable, or are simply not found on the charts.
Bottoming and Topping Formations have undergone the most substantial changes.  Some Bottoms and Tops are rarely seen, while some do not reverse the trend or only reverse it for a brief period of time, and others that were once common do not form at all.
These changes have been subtle and have been going on slowing for several years so these changes are often missed by retail traders.  Not recognizing these critical trend reversal technical patterns and how they are changing can affect trading profits.
Why the traditional bottoms and tops are no longer forming as they once did, is just as important as recognizing which of the bottoming or topping formations have been altered or lost.
The Bottoming and Topping formations are critical areas of a trend, and recognizing these patterns early on is key to successful investing and trading.  If a top has started but a trader is unaware or doesn’t recognize that topping pattern, an entry at that point could cause a huge loss.
Conversely, not recognizing bottoms as they are developing often leads to missed opportunities as stocks tend to run faster and longer out of bottoms in the current market structure.
Bottoming and Topping patterns are most sensitive to changes in the Market Participant Groups and the Market Participant Cycle.  This is because these are major pivotal points where a Shift of Sentiment™ occurs for the most important of all the 9 market participants, which is the Institutional Investor.
Since there are two primary types of Giant institutions, the Sell Side Institution and the Buy Side Institution, these huge lot investors can and do alter technical patterns.
One of the patterns that rarely forms in today’s automated stock market is the Head and Shoulders Top.  The market is dominated now by Dark Pools who use targeted price zones and specialized orders that insure their giant lots do not move price, and the High Frequency Traders who use special orders designed specifically for millisecond trading that is intended to move price rapidly with huge velocity runs. These cause the Head and Shoulders Topping formation to be disrupted before it can fully develop.
The Dark Pools often are in total control of price at bottoms.  With their precise targeted price zone, price is so tightly compacted with their huge lot orders that bottoms have altered dramatically. Inverse Head and Shoulders are extremely rare, W Bottoms are shallower and harder to identify, and Triple Bottoms have disappeared.  New formations are replacing these older style bottoms.  
Basing Bottoms, U Bottoms, Velocity Bottoms, and Quiet Accumulation Bottoms are just a few of the new bottom formations that technical traders need to learn to be able to recognize that a bottom has commenced, to enter early before the huge momentum runs that follow.
The Chart below is an example for one of the new bottoming patterns, which when identified early  offers strong profit as it completes.

The Chart below shows the completed bottom and subsequent momentum run.



Using outdated technical analysis in the electronic marketplace keeps traders from earning the high profits that most professionals enjoy.  Of all retail traders 90% of them lose money trading, while 90% of all professionals are making excellent income.  The difference is that the professionals continually keep up on the changes that are occurring in technical analysis patterns.
For more information Candlestick Patterns go to: http://goo.gl/Rv9aal
Trade wisely,
Martha Stokes CMT
Chartered Market Technician
Member of Market Technicians Association
Master Rated Technical Analyst for Decisions Unlimited, Inc.
Instructor and Developer of TechniTrader Stock Market Courses
For additional training visit http://technitrader.com
This Stock Discussion and Training Lesson is sponsored by TechniTrader.com
MetaStock® Partner

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