TechniTrader Beginner Education "Recognizing Weakness in a Sideways Candlestick Pattern" by Martha Stokes CMT

Signals of Earnings Reports Revealed in Stock Charts 


Stocks and the Stock Market move sideways about 70% of the time. Yes, some stocks get into periods of moderately trending activity but if you really look at charts just to see the 3 trends of Uptrending, Downtrending, or Sideways you will see that most of the time stocks are in some kind of Sideways Pattern.

Traders do not spend sufficient time learning how to recognize which of the several types of Sideways action is underway. Being able to accurately determine what type of sideways action is forming before the sideways pattern completes, will help tell you which direction the price will move, either the Uptrend Breakout or the Downtrend Breakout.

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Recognizing weakness in a Sideways Candlestick Pattern requires the use of more than Price indicators. Price indicators are incapable of leading price, because price must move in that direction before the indicator can show that in its line graph. Shortening the period settings does not make the price indicator lead, it merely makes the price indicator over-reactive to every price directional change that occurs naturally in Daily View or Intraday Charts.

The chart example below shows a sideways pattern that is 4 points wide.
chart example showing sideways pattern that is 4 points wide and volume declining - technitrader
This chart has a typical Platform Candlestick Formation common in the market today. The assumption might be that the stock will break to the upside due to the presence of giant Institutions using Dark Pools IF you only considered Price and did not check Volume indicators which reveal if the Institutions using Dark Pools are in Quiet Accumulation, Rotation, or Distribution mode.

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When studying the Volume indicators for this chart example there is clear evidence that while there are some Smaller Funds buying, Volume overall is declining due to large lots selling as this stock moves sideways in a fairly tight range.

There is a surge of Volume that moves the indicators into an extreme Angle of Ascent™ while Price maintains. This is a divergence pattern, because Price and Volume diverged. This is a negative divergence, as Price and Volume should be in harmony or in sync.

full chart example showing sideways pattern with 4 points range of high and lows, hft volume surge, and where distribution starts - technitrader

The stock immediately sells down the next 3 days, because large lots are on the sell side. Then the next few days the stock consolidates just slightly lower. However Volume indicators all turn to the downside quickly. The stock gaps twice, and halts at a prior Dark Pool Buy Zone™ which is at a 10 point lower level.

Summary

Recognizing weakness in a Sideways Candlestick Pattern is crucial if you want consistent success trading stocks. Price patterns are no longer sufficient by themselves to reveal the information needed to determine the direction of the stock after the Sideways Pattern completes.

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This particular Sideways Pattern is consistent with an Earnings Report release. During the sideways pattern Institutions Quiet Rotation™ occurred in Dark Pools on a very consistent basis. This giant Institutions activity was hidden from Smaller Funds and the retail crowd. The gaps are all driven by bad news and panic dumping.
During Earnings Seasons it is imperative to always read sideways action correctly, and that you are prepared for Earnings Reports. High Frequency Trading Firms use the earnings News to gap stocks, especially the most popular big blue chip stocks which are what most Retail Traders prefer to trade. 

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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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