Friday, October 17, 2014

The New Topping Formations: The Changing Technical Patterns Individual Traders Must Learn

The new venues and orders of Dark Pools, High Frequency Traders HFTs, Algorithms, Automated Orders, and Twilight Pools are changing the technical patterns that many traders and investors learned 10-20 years ago, and have come to rely upon. The alarming reality is that most technical traders are now falling further behind what the charts are actually telling them due to fact that they do not know these new patterns, and are utterly unprepared for how price will behave when these patterns show up on their charts.

Below is an example of the new types of patterns that traders are caught up in, and why more and more of them are losing money trading.

The candlestick pattern appears to be a strong reversal, and if only price indicators are used this appears to be a momentum move. The stock has broken through strong resistance, and is now moving higher with no resistance to hold it back. The price is well below the 100 whole number resistance level that often thwarts these runs, and gained 7+ points on its last run. Most swing traders would jump in at this point.

However studying the Hybrid Indicators warns there are problems within the run, that are not visible with just the candlesticks and price. First, the gap up was due to HFTs. This means that the subsequent run up was due to Volume Weighted Average Price VWAP smaller funds automated orders firing off, and individual traders chasing them. These groups weaken rapidly due to their lower capital resources, while volume confirms that their buying is fading. The most important indicator is the Volume Oscillator, which is the first indicator below the price chart.

The TechniTrader Volume Accumulation TTVA is showing a very weak pattern. TTVA tracks the consistency at which volume is moving into this stock, and how many large lots are buying consistently over time. This indicator exposes where Dark Pools are accumulating. However this indicator shows clearly that Dark Pools have been rotating out to lower held shares, rather than accumulating more. Also TechniTrader Flow of Funds TTFF shows the extreme risk pattern of a top.

The next few days the stock forms the New TOP formation that most traders are not expecting. This is called an Inverted U Shape Top. It forms on the short term trend and is caused by HFTs driving price up into the sell zone of the Dark Pools, who are quietly rotating out of this stock as it moves up. At some point the large lots selling overwhelm the smaller lots buying, and the stock runs down vertically faster than it moved up.

Many traders were buying stocks that were moving up to new highs prior to the recent correction, because they were unaware that all of the big blue chip stocks were showing similar patterns of Dark Pools rotating out or lowering their held positions. This is why so many individual traders are finding it harder and harder to make good profits regularly for monthly income.

Learning to incorporate the new Leading Hybrid Indicators that track the Dark and Twilight Pools is important for all individual traders. Dark Pools have highly sophisticated new orders that do not disturb price as they begin moving in or out. What that means is that any individual trader who is using the outdated older style price and time indicators, has no way of knowing that the Dark Pools are either buying in or selling out without disturbing the trend underway at that time.

Trade Wisely,

Martha Stokes CMT

Master Rated Technical Analyst for Decisions Unlimited, Inc.
Instructor & Developer of TechniTrader Stock Market Courses

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Disclaimer: All statements are the opinions of TechniTrader, its instructors and/or employees, and are not to be construed as anything more than an opinion. TechniTrader is not a broker or an investment advisor; it is strictly an educational service. There is risk in trading financial assets and derivatives. Due diligence is required for any investment. It should not be assumed that the methods or techniques presented cannot result in losses. Examples presented are for educational purposes only.

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