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: 
http://chalannn.blogspot.com/2014/01/finding-trades-before-new-trend-gets.html

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 

Anatomy of the setup bar, then possible HLP. To anticipate price reversals on any trend.

The setup bar comes in many shapes as shown on the chart below, because more than an obvious physical look it's a candlestick that begins to give shape as the middle of a new pivot in the making, price inside the action is very dynamic at least from the 1 to the 60 minute time frames and pivots reinforce the prevailing trend on the larger time frames,  daily or weekly charts. 
The most solid setup bars look like bottoming tails that continue moving higher, because the weak hands were shaken out during their formation, price will move higher now that most sellers are out.
It forms like this, at the opening of the trading day price drops noticeably hard from a clear small base or after three candle pullback in an uptrend on the daily chart, price completely reverses by the closing day turning the price breakdown from a big red candle into a bottoming tail (it happens in all time frames TFs but the larger the TF. Such as the daily or weekly charts the more relevant it is).
Some setup bars look like big red candles, price bounces next day, the lows of said candle never gets retested and price continues moving higher forming the higher low pivot, the prevailing trend helps you identify the pivot formation. My bread and butter trade from the 15 minute to the weekly chart. 
Again, in my opinion the setup bar occurs at the right area in the chart to get rid of weak hands, eventually forming a higher low pivot to begin the next cycle higher (most of the time). Vice versa in a downtrend.


Read and memorize this chart first because it is the main point of the lesson and at the hearth of trend analysis.

To be sure these strategies can be very rewarding but require understanding of price behavior.
We can't buy every stock we see simply because its daily or weekly chart (depending on your time frame of choice) has A TIGHT CONSOLIDATION with the last three candles having none consecutive higher lows to the left of today's candle thus leading us to expect that a setup bar will form and eventually completing a higher low pivot HLP. To send price higher.
For the well seasoned in the market or on this strategy, experience and the charts tells us when we need to enter the stock, even as aggressive as when the setup bar is forming if need be, provided other signals on your check list are aligning such as Fib. Retracements, price on support or the last bar is narrowing after a multiple day pullback, etc, etc.
One clear example is if price is in an uptrend on its daily chart, after forming a base for a while to absorb all the sellers and if the HLP. Forms, the odds are high that a new move higher will begin very soon.
Large pullbacks in an uptrend also form setup bars and HLPs but the dynamics differ compared to a basing process. I'll explain in more detail below.
Once price looks ready to pivot higher the HLP. Formation can be anticipated using these techniques.
Why the need to find where the higher low pivot will form? Because in the ebb and flow of the uptrend you normally see a 100% move higher and a 50% pullback in price, but sometimes price only pulls back 20% and if you sold your position expecting a deeper pullback and you're able to recognize the HLP. Formation you reenter immediately your long position to capitalize on the next move higher placing a stop below the HLP.
Very strong stocks sometimes don't even form clear higher low pivots, you just buy the breakout. But I'm getting into a more advanced topic here. 
The blog has countless examples and lessons on how to analyze trend and price behavior.

Based on my trading experience and trading plan I usually wait for the second higher low bar to the right of the setup bar to complete to enter long, the closer price is to the setup bar the more aggressive the entry and higher odds of the trade stopping outs unless you use other strong signals to confirm your bias and urgency such as  higher time frames signaling an immediate move higher, etc. Etc. 
Even if the higher low pivot completes there is no guarantee that price will move higher, other than higher highs beget higher highs inside the uptrend.
Algos or computer trading programs relay heavily on trend pivot formation amongst other indicators on their technical analysis of price action, I see it and I try to profit from it every day in the markets in all time frames.

The chart above has the weekly and daily charts of SGMO. Of note I will differentiate the set up bar with a single purple line, the completed pivot will have a purple arrow.
The weekly chart shows a big consolidation taking place for the last eight weeks, the HLP. Isn't completed yet but is near completion, the third candle that tests the low of the setup bar is usually the best area to look for entry because if price doesn't break down lower, the pattern signals that price will be moving higher once the HLP. Completes and your risk reward is like 7 to 1. Remember pros buy low and sell high to who?
If one enters on the last test or near the low of the setup bar and price breaks down the loss will be small, like 50 cents small.
The daily chart shows a big price channel, the blue square enclosed three candles because it was only Wednesday when the chart was produced needing two more days for the weekly candle to complete thus the HLP. Formation was still happening.
The green box shows the best entry areas anticipating the big funds defending the future HLP. Being near completion.

The chart above shows you two different set up bars and two HLPs on the daily chart. 
As you can see both setups have very different dynamics, the first one is a deep pullback in an uptrend, it requires knowledge of price behavior inside the trend (All that info inside the blog) that said if you know how and where price will reverse  to the top, it can be extremely profitable with a small risk if you enter at the right time.
The second pivot formation is no longer in an uptrend but price has lost most of its volatility letting folks enter near the setup bar once the HLP. Looks ready to complete.

Sometimes I get the impression that in an uptrend the only thing price needs to move higher is to trade under some obvious support after basing for a few bars, take some stops (form setup bar) once folks give up on the pattern thinking that it's breaking down price reverses back to the top and takes off higher forming the next HLP.
The daily chart of NUGT Was just absorbing the large move seen on its weekly chart. 
The daily chart has a HLP. Formed eight bars ago, price was still holding above that HLP.  And was aimlessly basing above its rising 20 MA. Waiting for price to touch said MA. Then price suddenly dropped and took some stops under that quasi base thus touching the 20 MA.
The enclosed 4 candles tells us the the chart was produced on a Thursday.

Even the 60 minute chart was entering a downtrend as shown on this new chart. The next day was a Friday, price jumped higher turning the small red candle on the weekly chart into a green bottoming tail but more importantly giving clues that no breakdown was taking place on the daily chart, the next daily candle on Monday coincided with the breakout on the weekly chart into an area of little resistance following the small rest (thus the giant up move the following days) and confirming that the pullback two days earlier seen on the daily chart was to pivot higher. 
Basically when price failed to break down it trapped some shorts then triggered a powerful short covering move higher into an area of little resistance.

This chart of DGAZ Gave me some clues that price was going to possibly form a HLP. On its daily chart, it had a potent bounce with very heavy volume from the test of the first bottom, the three days indicated with the thin purple line were the last three days of the week, the pullback on those days was very small and it needed a setup bar I thought.
A: On Monday DGAZ Opened flat and sure enough it dropped enough under the low of the three previous candles immediately bouncing and closing near the high of the day, next day instead of continuing higher it had a lower opening gap forcing some selling enough to send price below Monday's low or B.
On Wednesday price opened flat and tried to test Tuesday's lows but a higher low formed sending price higher and maybe signaling that the setup bar was on Tuesday instead of Monday.
Some times when the setup bar isn't to obvious enough price returns to make a clearer setup bar to pivot higher, will that be the case this time we should see in two more days.

The next chart is the weekly, daily and 60 minute charts of GOGO. I'll keep it simple, referring only to the daily and 60 minute charts the rest of the lesson.
The daily chart stopped its downtrend with a double bottom, the big thick purple lines are the same size indicating that the second move lower was smaller than the first one, signaling that sellers had exhausted and that double bottom confirmed it.
Price bounced for three days indicated by the red asterisk, on the last red day forming a possible lower high setup bar.
The 60 minute chart was trying to establish an uptrend.

The next day price kept dropping under the three day base, the daily chart was no longer in a downtrend, it was just forming a base, it could had very easily tested that double bottom below. 
Near the 50% retracement mark of the up move on the daily chart, the hourly chart reversed during the second half of the trading day closing above its opening and forming a possible set up bar on the daily chart.
Sometimes (inside tight bases) as you'll see below, the daily chart begins falling hard looking like it would form a big red breakdown candle by the close but after lunch it reverses all the way back on the hourly chart, closing the daily candle on the green or with a big reversing bottoming tail.

Next day GOGO Had a higher opening gap and buyers jumped on it immediately signaling that the drop the day before was a setup bar to pivot nigher.
On the 60 minute chart the largest up move happened during the first hour and it consolidated that move the rest of the day, usually a sign of little selling and higher price if buyers push at the open next day.

The next day price ignited another move higher as was indicated by the bullish consolidation on the 60 minute chart the day before.
The higher opening gap into an area of no resistance kept the sellers away for one more day, forming a very the big green bar on the daily chart.
All this move began with the formation of the setup bar three days earlier. The biggest point to take out of this example is that the daily chart of GOGO Was trend less and basing when the setup bar signaled the next move higher was coming.


Below are the charts of the IMW And SPY ETFs. 
After closing on an all time high the week before, the following Monday both had a lower opening gap due to some bad geopolitical headline.
As seen in the 60 minute charts, the first three hours looked like these two ETFs were going to collapse but the reversal in the last three hours signaled that both were potentially forming a set up bar  to pivot higher, after all both were in an uptrend on their daily charts.
Both could had opened the next day with a lower opening gap like the gap lower on DGAZ As shown above, that is what stops are for, if you entered early and the lower opening gap happens the next day, you sell and take a small lose because if the bottoming tail fails to reestablish the balance back to the longs, more selling will follow not only from yesterday's new longs like you but every other long looking for excuses to get out of the markets, specially after a giant
The enclosed red candle on the daily charts shows you the way the daily charts looked during the first three hours, if the daily chart was to continue going lower the 60 minute chart would stop going lower for an hour or so during doldrums, midday or lunch, take a rest and then continue going lower after lunch all the way until the close, forming a big red candle on the daily chart. 
But if the hourly chart instead of going lower the last half of the day reverses back to the top the shorts have to be asking themselves is this the setup bar to pivot higher and should I cover? And so should you.
 

Same action on the SPY:

Don't take my word for it, print some charts of tight consolidations and look for the setup bar and the actual trend pivot formation and completion, what happens after that? Take some notes and even if you see potential on these strategies, paper trade them first until you feel comfortable risking your own hard earned money.


The next day after this lesson AAPL Did this and you should recognize it by now.

Lesson #4 Time frame cycles: http://chalannn.blogspot.com/2012/08/time-frame-cycles-from-monthly-to-15.html

If this lesson doesn't make any sense to you, read the first 20 lessons on this blog, because they explain in detail the method I use to analyze any stock in any market.


Feel free to leave a comment. 

All charts are source www.FreeStockCharts.com