charts from the squirralist... i love charting

When a chart pattern fails, either before or after confirmation, it can be one of the best market entry signals.

What is pattern failure?

Pattern failure occurs when the price action reverses and gives a contrary signal. There are two ways a pattern can fail. The first is by never confirming a potential pattern and the other is by confirming the pattern and then failing. The opportunity for profits from pattern failure is usually good because not only are many traders taking advantage of the pattern failure signal, but also there are many traders invested in the initial signal who must exit the trade, giving it even more momentum to move in the contrary direction. The failure of a confirmed pattern should therefore trigger a  powerful counteraction because



Karoon Gas and pattern failure

Another example of a failed pattern is on the Karoon Gas Australia chart. This stock peaked in mid-November after a rapid run higher. It retested the highs of December and formed a potential double top. That pattern was confirmed on December 15 when the price closed below the intervening low of 4.54 from November 25. But instead of falling a price equal to the vertical distance of the pattern, it fell only to a low of 4.22, before staging a strong rebound that eventually led to a close above the original pattern highs.



Technical signal failure

The same can happen when a technical indicator gives a signal in one direction and then fails to move in that direction. The event is very common with Bollinger Bands. Even after hugging a top Bollinger band a sell signal may be given when a price hits the top Bollinger but the price dips moderately and does not move to the opposite Bollinger Band. When a price moves above a top Bollinger Band for a second time it can mean a strong move higher is occurring and vice versa for a rejection of a lower Bollinger Band.

Beware of the intraday break

When a pattern failures it should occur on a closing break. One that happens only on an intraday break is unlikely to be a failure and can often move strongly in the direction that the pattern dictates. An example of this would be the triple top where the third top has breached the other two tops on an intraday basis and not on a closing basis and then price then proceeds to fall precipitously.

Stop and reverse

Trading a pattern failure can be a good way to turn an unprofitable trade into a new trade that is immediately profitable. A stop and reverse order can put you instantly out of a trade where the pattern has failed and into a new trade in the opposite direction.

 

The information and analysis provided by The Squirrelist is of a general nature and it is not intended to be the basis for any financial decision, nor are any opinions herein financial advice, neither personal or general, and ought not to be relied upon as such.

Now that I am a chartist convert I just do my best to help... I tipped the 5.55 as high pivot point

Sell sell sell