Analyzing
Downtrend Price Action of Bounces, Rebounds, and Reversals
During a Downtrend
price does not just go down, instead it often has brief periods where it moves
up. Determining whether it is just a Bounce, Rebound, or a true Reversal
requires Spatial Pattern Recognition Skills to read the chart properly.
Everyone learns the
basics of candlesticks as this is currently the most popular chart style to
use. However, just learning the Japanese continuation or reversal patterns is
where a Technical Trader starts. If a Trader wants to become a proficient
Semi-Professional or Professional income earning Trader, then they must learn
more than just these basics.
The chart example
below shows the different candlestick patterns of Bounces, Rebounds, and
Reversals.
Which Market Participant Groups are in control of price at the time:
1. Professional Traders who sell short
2. Retail Investors or Retail Traders typically using guru
recommendations
3. High Frequency Trading Firms are trading to move price
4. Dark Pools aka the giant Buy Side Institutions are long-
term Investors, buying on behalf of their Mutual Fund
Holders
Whether the candlestick pattern is a:
1. Buy to Cover order
2. Buy-on-the-Dip order
3. Time Weighted Average Price order
The intent of the buy order:
1. Close a Sell Short position
2. Purchase stock at a perceived area, where the stock will
continue moving up
3. Incrementally purchase a very large quantity of shares over
an extended period of time
Once you recognize the above specifics then how to Identify Candle Pattern Bounces, Rebounds, or Reversals becomes self-evident. This is because as each Market Participant Group controls price, they form a distinctly different candlestick pattern on the chart based on their intent of the trade.
Go watch "Exploit the High Frequency Traders" Webinar to learn how to find and track price patterns that trigger huge gaps and runs, and when to exit a trade High Frequency Trader driven.
Professional Traders that have placed Sell Short and Buy to Cover orders create Bounce candlesticks. These candles form usually at support levels, and are small with moderate volume.
There are Retail
Investors and Retail Traders lacking sufficient stock market education, and
depend upon others for their decisions. Often Retail Brokers or gurus who would
benefit, encourage Buy-on-the-Dip at non-technical levels. These candlesticks
tend to be longer which are an anomaly in the technical pattern, and can gap or
run with very low Volume.
They are Rebound
candlesticks, and can move up seeming to be a Reversal aka Rally but in fact
only give the illusion of it. They then fail at weak support levels as Professional
Traders and High Frequency Trading Firms step back in, to sell short again
ahead of negative news.
High
Frequency Trading is all fully automated. There is no human controlling what is
bought or sold. Usually their action occurs in the first few minutes of the
day. If High Frequency Trading fill queues ahead of market open with order over
flow, then the computers that make the market these days will gap up the stock.
These are also Rebound candlestick patterns.
Dark
Pools aka the giant Buy Side Institutions use Time Weighted Average Price
orders to control price, and not disturb the trend early on in their
accumulation mode. Their candlesticks are small, tightly formed, and sideways.
They develop the chart bottoms and start the true rallies once their
accumulation leaks out to other Market Participant Groups, mostly Smaller Funds
who chase the Dark Pool activity.
Beginners go watch
“The Basics of the Stock Market” 12 Webinar Lessons.
Go to the
TechniTrader
Go to Learning Center to access a wide variety of training webinars including Candlestick Patterns, Technical Analysis, How to Improve MACD, and Bollinger Bands.
TechniTrader
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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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