Tuesday, March 11, 2014

Anatomy of a climactic setup, with clues for entries to short near the top.

I keep writing these lessons because regular folks are getting trapped inside these very complex trades, that required understanding and planning, without both the odds are high you will lose money.

"So this is Christmas" John Lennon. 

This pattern and setup will make you feel like that if you are able to use this lesson and short near the top or sell all your longs before the collapse, the next time you see a parabolic, climactic move.

Read and memorize the chart below because it is the main point of the lesson and the heart of trend analysis.

Below the daily and 60 minute charts of TWTR. On the last up move, it lasted five green days, of note the fifth day closed with a hanging man (I think is called) very far away from is rising 20 moving average, the massive volume signaling that everybody that wanted to be long was long, fluid moves like the one TWTR Had during this five day period don't form many bases on the smaller time frames leaving areas of very little support if price for some reason begins to cascade lower with trapped longs, get my point?
I'm getting ahead here, if you read the first chart, where do you short a stock with such a powerful move higher? YOU DON'T. 
At least not until the 60 minute chart forms either a double top or at a minimum forms a lower high ( lower highs form head and Shoulders patterns HS. Some are nullified if new highs are made but some are not specially if the uptrend reached parabolic climax and price drops like a rock) signaling buyers exhausting on the powerful uptrend and placing your stop above the previous high in case the bulls have one more push higher to continue the uptrend.

Remember you are trying to short an up trending stock on all its time frames (and a very powerful one at that) one of MY biggest rule in trading is to never short against a normal up trend and vice versa but the exception in this case is that the daily chart got parabolic and climactic (THE ONLY TIME I allow my self to short because the odds are on my side based on this analysis) The momentum sucked in everybody and the odds are high of a fast and hard pullback.

TWTR On its 60 minute chart was extended, even parabolic but it was in an up trend, it had a normal pullback that looked like it could morph into a H & S Pattern if bulls weren't able to make new highs on higher volume BUT was still in an uptrend, the daily chart was giving great odds to go short but whomever entered short due to that POSSIBLE H&S In the making on 60 minute chart was speculating more than shorting with confirmation.

Next day it had a lower opening gap confirming the bearish pattern or the 60 minute H&S In the making that began to form the day before, remember the area of zero support underneath? Remember the massive volume telling you that everyone and their dogs were long?
Remember the separation of price from its R20MA? How about gravity? 
When a stock has no buyers and only sellers trying to get out all at once price discovery begins until it finds support, and it did on TWTR 15$ points lower two days later as shown on the chart below. 

Below is the daily and 60 minute chart of PLUG 3/10/14 

Do you see the similarities on the daily charts of TWTR And PLUG?

The question is always the same, where does one enters a short trade inside a giant up move? Can this or that stock I'm looking at keep moving up forever? 
For the most part even stocks like AAPL on its run to 700$ in 2012 Had its pullbacks occasionally to shake some weak hands and continue moving higher, that said up trending moves are very different to parabolic moves because normal uptrend moves are usually more predictable by measuring the earlier price waves sort of a 100% move higher and 40% drop and on and on until it forms a double top or lower high and possibly begin to trend lower, but on parabolic moves one side of the trade is totally trapped or being trapped as the up move is happening and the other side, longs in this case are in total control of price. 

So I read Chalan's TA Blog and he says that for the larger time frames to move lower the smaller ones need to enter into a  downtrend first.

I'll use the 15 minute chart for the faster signal, the daily chart was so extended that if the 15 minute lost its uptrend first, the 60 minute chart was going to turn lower second turning the daily candle red.
Sort of collapsing a giant kicking his bad knee.

The 15 minute chart was in an uptrend so no shorting anywhere if you read the first chart or the second explanation of the 60 minute chart needing a 2X top or H&S Pattern FIRST. 
After the open it had a decent consolidation the first two hours, the bulls pushed price higher the rest of the day but the up move got large and some selling followed enough to form a HL Pivot (purple arrow) followed by a weak bounce sending price back to test that HLP. But that pivot held price from falling more because its 60 minute chart was simply having a controlled pullback.
The 60 minute chart remained in an uptrend, no shorts other than scalps there, and the daily got more extended to the upside.

Next day the higher opening gap got sold turning the 60 minute chart into a 2X top. FIRST short warning signal.
Seen through the 15 minute chart the first pullback found dip buyers (normal in such a powerful uptrend) bouncing price higher, forming  another HLP But the bounce that followed was weak forming a lower higher pivot and H&S Pattern putting the uptrend on this faster TF In question (because the 60 minute chart had a 2X top in place, reads lost the uptrend) and that was the biggest signal professionals got that the trend was about to possibly change, both TFs flashing the move lower, the second signal was the HLP. On the 15 minute chart wasn't able to hold price (second bottom purple arrow) anymore because the 60 2X top bla, bla, bla.
Once price broke the HLP. On the 60 minute chart (purple arrow)
Remember about the no support area because the fluid move to the upside explanation earlier? Gravity? Everyone being long? PLUG Daily's chart being climactic; and on and on?

That is basically what happened to PLUG On this day.

What is going to happen to plug going forward? Your guess is as good as mine but here are two charts to consider:

This is a very simple strategy to capitalize immensely from the unsuspecting late longs, it works to catch falling daggers as well, just turn your monitor upside down.

Always keep this in mind. EXTREMELY IMPORTANT.
The other two lessons on shorting parabolic climactic exhaustion, described the momentum chasing crowd creating a big buying imbalance that can last for weeks until the stock reaches buying exhaustion, from pure speculation at the time when some forces are signaling a move in price in the opposite direction due to the share imbalance. 
BUT.... There is always a but.
If a drug maker discovers the cure for cancer (Or hazmat suit makers as was the case lately for their manufactures LAKE and APT), then the sky is the limit on its stock's price as sales will multiply over night, this is a very different scenario. 
Even then at some point most of the good news will be priced in but at a much higher price than most expect, utilizing these charting techniques to identify tops can help you stay ahead of the masses.

Edit 9/28/14:

And then there was GPRO:

The weekly chart is very extended in need of a pullback, the daily chart had a hanging man candle two days ago similar to the second chart on this lesson, or the daily chart of TWTR The only difference is the volume on GPRO is not as climactic visually. 

SO why GPRO Didn't collapse? Not all parabolic moves collapse immediately or at all, but lets look inside the 60 minute chart for clues.

The simple answer is that the little selling there was didn't trigger any swing short signals as it did on the 15 And 60 minute charts in the examples above.

1- The hourly chart established a new uptrend. 2- Points to what looked like an exhaustion gap on the daily chart during the first hour. 3- The selling formed the biggest red candle top of the whole 60 minute chart. 4- It had no follow through confirmation to the downside or continuation lower, on the next bar it formed a bottoming hammer, three candles later completing a HL Pivot (marked purple) the uptrend remained, basically the pullback was to pivot higher. 5- Once bulls on the sidelines realized sellers were weak they went back in sending price higher closing price near the top forming a 2X Top on the 60 min. Chart. Forming a hanging man candle on its daily chart signaling a possible reversal. 6- Next day it opened with a lower gap that again had no follow through lower holding above the last HL Pivot, again weak sellers proved no match for the buying that followed forming another HL Pivot that sent price back to the top. 7- Closing above the 2X Top re establishing the uptrend. 8- A weak pullback followed by more buying and  NHs.

Remember as long as the 60 minute chart remains in an uptrend the daily chart will keep moving higher, as was posted on the very first chart of the lesson.

Here is the 15 minute chart, as long as this time frame remains in an uptrend the 60 and daily charts will keep moving higher.

Read the first chart in the lesson, as soon as you see two lower highs and two lower lows confirmed on the 15 minute chart the 60 minute chart will be ready to enter its own downtrend and the daily chart will follow lower.

I'll post that chart on the following days.

Next day the short squeeze continued, seen through the 15 minute chart, the first bounce following the first pullback was weak but price formed a second HL Pivot (the same way the hourly chart did a few days ago as seen on the same chart) eventually making new highs keeping the up trend on that time frame. The 60 and daily charts kept moving higher. 
Of note the volume on the daily chart was getting noticeably heavier.

Next day #1 The higher open gap (could have been an exhaustion gap if it had follow through lower) got sold off immediately but the drop wasn't deep enough to form a HL Pivot on the 60 minute chart. 
A major pivot has three non consecutive higher low candles on each side, read more on pivot formation here:  http://chalannn.blogspot.com/2012/08/anatomy-of-trend-pivot-disclaimer.html

Once buyers on the sidelines and dip buyers realized selling had eased they bought forcing a price bounce that was weak forming the first lower high on the 15 minute chart #2 putting the up trend in question, price pulled back enough to form a HL Pivot to try to re establish the uptrend but the following bounce was weak forming a fractal 2X Top #3. After that price dropped closing below the last HL Pivot now changing the trend to sideways with bias to move lower.
The 2X Top on the 15 min. Chart also formed a LH Set up bar on the 60 min. Chart marked with the red asterisk. 
The daily chart was very extended with heavier volume, the 60 min. Chart had a possible LH 2X Top and the 15 min. Chart was ready to trend lower. GPRO Needed a higher open gap with a short covering rally during the first hour the next day to close above that hourly double top to nullify it; if not the odds were high that the top was in place.

Next day it was just a narrow body day on the daily chart, a victory for the bulls right? After all price didn't collapse. Well, yes and no. 
The open was flat and immediately found sellers completing the LH Pivot on the 60 chart. That time frame lost the uptrend (now the uptrend was in question and needed to be resolved by either a new high re-establishing it or LLs to begin forming a future downtrend keeping in mind the weekly and daily charts were extended in need of a pullback), alerting the shorting programs,
the selling during the rest of the day clearly established a downtrend on the 15 min. Chart. Remember what I posted above "For the daily and 60 min. Charts to stop moving higher the 15 min. Chart needs to enter in a downtrend first" Now it is and as long as that remains the other two will keep moving lower.
On the last hour the bulls tried to void the downtrend on the 15 minute chart by closing above the last LH Pivot but price stopped below said Pivot warning bulls of trouble in the future.
The 60 minute chart wasn't able to form HL Pivot to move higher.

Read the first chart of this lesson to get intimate with trend change analysis.

On the previous day the 60 minute chart formed one LH Pivot (all market purple) and the 15 minute chart established a new downtrend. 
Fluid moves higher leave no bases underneath from where price could bounce if it falls, if price enters one of these fluid moves it behaves like inside of an air packet, where price moves swiftly in the opposite direction, because professionals usually like to enter on support not away from it.

Next day GPRO Opened with a lower opening gap inside one of these air packets, there was no support under it until it reached 78-80$ which was my posted price target on Stocktwits. 
I highlighted that base that formed six days earlier.

Seen through the 15 chart once price hit that support the first bounce was weak but price formed a HL Pivot stopping the downtrend on that time frame. 
The pullback happened inside an up trending daily chart, (remember higher highs beget more higher highs after a pullback) after reaching support the next cycle higher would begin next week if it was a normal uptrend but GPRO Weekly chart is very extended to the upside.
IMO It will not make NHs but instead will form a LH On its daily chart and head lower.
Again look for the 15 minute chart to begin forming LHs and LLs near the area of the open gap from the last chart, for the same pattern on the 15 minute chart that signaled the beginning of a 15$ Pull back.
For those that now know how to recognize the anatomy of a trend change on the smaller time frame affects the larger time frames inside a climactic move.

Just remember if the uptrend continues on the 15 minute chart the 60 and daily charts will keep moving higher and vive-versa.

A few days later the pattern developed somewhat as predicted, The bulls on GPRO Tried one more short at making new highs but the volume was very light so they failed, there were two clues of that happening: 1- The first high was on climax volume. 2- The selling volume two days later was massive signaling big institutions getting out, it simply didn't have the committed bulls anymore, price came back to support after forming the 2X Top..
Seen through the 60 minute chart.

I hope you learned something that can protect you from sharks in the future and it can turn you into one. 

Part II: On climax and capitulation trades: 

Part III: Apparent capitulation patterns that weren't: http://chalannn.blogspot.com/2014/10/capitualtion-patterns-that-behaved.html

Feel free to leave a comment. 

All charts are source www.FreeStockCharts.com 

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