Monday, October 1, 2012

The Changing Price Patterns in Technical Analysis

MetaStock SPRS Series - Week 88 - TechniTrader® Stock Discussion for MetaStock Users - The Changing Price Patterns in Technical Analysis - October 1, 2012
By: Martha Stokes C.M.T.

One aspect of changes to the Market Structure that many retail traders do not realize is that internal operations, procedures, market participant groups, order processing systems, changes to order execution, SEC rules and regulations on trading, etc. change due to new technologies. The financial markets have been adopting new technologies over the past several years, AND there have been numerous changes to rules and regulations by the SEC and Congress. These changes affect the price patterns you will see on a chart.

Often times, retail traders are stuck back in the 1970’s - 80’s with outdated technical analysis patterns that either have changed dramatically due to all the changes in market structure, OR do not form often anymore.

As the markets change and adapt so too do the millions of people who buy and sell stocks. One area that has changed dramatically in recent years is how, when, and where bottoms develop, complete, and their patterns.

It used to be that you could count on the basic bottoming patterns from the early technical analysis books written 20-40 years ago.

  1. Inverse Head and Shoulder bottom
  2. Bowl bottom
  3. Triple bottom
  4. Double bottom
  5. V bottom
That basically was all the bottoms that formed. But in recent years new forms of bottoming patterns are emerging along with the traditional bottoms. As a retail trader, it is critical to also be able to recognize these both to avoid selling short in a bottom AND to be able to reap the potential profits of the fast runs out of certain types of bottoms.

The chart following is just one example of a new kind of bottom formation. It is actually a platform, which is a very precise sideways pattern with consistent highs and consistent lows. Price falls rapidly to a low, then the sideways action commences with highs and lows that stay within a precise and narrow range. This differs from a bowl shape as the bottom is not round. Nor is it a double or triple bottom, which are wider ranges in price and have inconsistent highs and lows. This precision style bottom is actually more of a U shape, a variation of the V with the same velocity and momentum action on the down side and upside. This one happens to also have gaps which are far more common these days than in years past.

Chart 1

All of these changes have occurred due to the different market participant groups, how they buy stocks in bottoms, and which market participants actually create this kind of bottom.

With the advent of Dark Pools, the off-the-exchange and over the counter large lot order processing trading platforms, this type of bottom is becoming more common. It is easy to miss during its development and many times swing style sell short traders may assume the stock is going to head down further, when they should actually be trying to enter prior to the move up.

Recognizing the new technical patterns that are forming in the modern automated marketplace is a critical aspect of keeping current with what is going on in the stock market. Technical analysis and technical patterns will continue to change as the market structures change.

Trade wisely,

Martha Stokes, C.M.T.
Member of Market Technicians Association
Master Rated Technical Analyst: Decisions Unlimited, Inc.
Instructor and Developer of TechniTrader® Stock Market Courses
MetaStock Partner

©2012 Decisions Unlimited, Inc.

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