How to Identify Early Shift of Sentiment™ Bottoms
One question every
Trader is asking right now is, “When will this Correction end?” A better
question is, “How do I determine a particular stock will soon start a Bottom
Formation?”
Every Technical and
Retail Trader knows that Bottoms are often completed with a Momentum or
Velocity run, but few are able to capture that big gain because they are unable
to recognize the patterns that precede it. Instead most Technical Traders chase
the run, and either net a mediocre profit or have a small loss instead of the
big gains they wanted.
It is a simple matter
of knowing what to look for during a Correction that will indicate BEFORE the
momentum of a Short Term Bottom or Rebound, that the stock has hit a Dark Pool
Buy Zone™ and will start a Bottom shortly thereafter. “Relational Analysis™” is
what I call this early kind of identification.
The following are
several factors to look for in a chart, which reveal Dark Pool Buy Zones:
1 1. Price action
2 2. Volume
3 3. Support levels
The chart example
below shows one of the new classic Price, Volume, and Support patterns.
When interpreting
extreme candlestick patterns using Relational Analysis, the following is the
order in which to proceed with the chart analysis:
1. Look at Price
first.
In this chart example
after a huge gap and run down, price has shifted to an ever tightening
Compression pattern. Compression patterns tend to form before a sudden breakout
aka Momentum or Velocity run.
2. Next look at
Volume.
In this chart example
the huge extreme Volume spike, that forms as the stock plummets right into a
prior Dark Pool Buy Zone. This is an exhaustion pattern on Volume to the
downside. High Frequency Traders HFTs are computer algorithms that often drive
price down into a Buy Zone. How price behaves after the price gap and run down
on extreme Volume, is a key element in Relational Analysis.
3. Finally look at
Support Levels.
Looking for Support
is the technical aspect of this analysis. Price is holding at this level for a
reason, and not by accident or coincidence. In addition, Price is compacting
tightly for a reason. The Accum/Dist indicator has turned up after hitting the
bottom of its indicator chart window, and the Money Flow Index MFI indicator is
above its Exponential Moving Average EMA in the bottom chart window. Both
reveal Dark Pool Time Weighted Average Price TWAP orders. TWAP is a specific
type of order that triggers automatically over an extended period of time,
creating a consistent pattern in Price action, Volume, Accumulation, and Flow
of Funds into a stock.
Below is a look at
the weekly chart view of this stock example which shows that it has indeed hit
a Dark Pool Buy Zone.
Summary
Momentum and Velocity
action out of an extreme bottom low are excellent opportunities for Swing and
Day Traders. Using Relational Analysis™ to identify potential candidates
early for momentum and velocity trading is best. Waiting until after the run
has already begun can use up much of the Point Gain Potential, which lowers
profits and increases risk.
For entries on these
patterns a trader must also consider underlying Momentum, overall Market Bias
for the entry day, strength of Indicators, Risk versus Point Gain Potential,
Support for the Stop Loss, and points to Resistance.
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Trade Wisely,
Martha Stokes CMT
TechniTrader technical analysis using a StockCharts chart, courtesy of StockCharts.com
Chartered Market Technician
Instructor & Developer of TechniTrader Stock and Option Courses
TechniTrader DVDs with every course.
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