3D Trade Execution
Short-term traders often focus on large elements of the
pattern cycle and miss important signals buried within intraday
price movement. This relativity error forces them to wait on the
sidelines until these major swing points are reached and
participants from broader time frames enter the game. Rather
than wait, traders can locate good setups by reading reversal
and breakout patterns within very short periods of cyclical
Chart analysis works best when several time frames are combined
to identify important swing points and breakouts. But once the
short-term trader identifies the broad framework of support and
resistance, profits come from predicting how the next few
minutes or hours of market action will play out.
Let's trade through a small pattern cycle following a powerful
Intuit (INTU) rally.
As INTU slowly pulled out of a 9-month base in mid-October, few
realized it was headed into a quick price triple. Typically,
short-term traders become aware of dynamic rallies very late in
their development. The majority then engages in momentum
strategies to chase the big move. But risk is very high at this
stage of the broader pattern cycle. As stocks go parabolic,
traders get caught in sharp downdrafts that empty pockets as
quickly as they are filled.
Smart technicians use major reversals, such as the one INTU
printed at 60, to signal the start of predictable swing trading
conditions. The downswing generates fear and provides a perfect
environment for well-defined pattern and support-resistance
formation. But don't rush into poorly defined entries. Be
patient and wait for the right opportunities to develop.
While good short sales print on the downdraft, we'll concentrate
on going long with the uptrend. A large crowd always misses the
boat on strong rallies and sees any pullback as a good entry.
Our first job will be to wait until a bottom pattern prints and
then join them. This can occur in a few minutes but routinely
takes several days to form on a typical 15-min or 60-min chart.
We are fortunate with INTU. The appearance of a symmetrical
triangle quickly defines a possible bottom and clear breakout
point. Note how our bottom support line actually violates the
11/30 low. The markets rarely offer perfection on very
short-term patterns. Traders must be skilled enough to draw
useful trendlines based on limited and conflicting information.
If we have done our drawing well, the gap on the morning of the
2nd will be immediately recognized as a breakout from that
triangle and completion of the bottom reversal pattern.
The market does not give away its gifts easily. Traders that
buy the INTU morning gap face considerable whipsaw action until
the lunch hour. Note the common 3rd bar reversal just 10 minutes
after the market opens. This sets the stage for traders to apply
a simple 1st hour range breakout strategy and look for an entry
just above the reversal high.
The pattern also offers swing traders safe entry on both the
first test of the morning gap and the double bottom test later
that morning. However those that enter at bottom support then
risk considerable profit if they choose to hold to new highs.
Exit this classic swing trade just before the top of the first
hour range and consider the setup for a new breakout trade on
its own merits.
The safest breakout entry takes place just minutes before the
move above the morning highs. But how will the trader know to
buy? A well-trained eye recognizes the small cup action of the
tall bar just prior to the breakout. The morning pattern gives
up its secret here, leaving the smart trader with 2-3 minutes to
enter quietly at the bid through a favorite ECN. Also note the
small ascending triangle just above the breakout point. New
breakouts typically pause for 4-6 bars before momentum shoots
out in a tall candlestick.
The next morning opens with a powerful opportunity for traders.
It takes very strong demand to break the rising trendline of a
price channel. For this reason, channel breaks often produce
very tall price bars immediately following the initial signal.
Note how much of the break takes place in the first 30 minutes
of trading. This offers a very small window for the trader to
get on board safely.
INTU pattern cycles shift back and forth through charts of
different time frames. If you get lazy and only focus your
attention on a single segment, your level II screen may flash a
breakout but you won't understand the source or reason. Without
the right information, odds increase that you'll jump in at the
wrong time and buy a top or sell a bottom.
Good traders know when to stand aside. As INTU approaches 60,
long side trades become very risky. But after the strong
momentum of the opening move, shouldn't we expect another long
thrust after a short pullback? At this point, our strategy
relies on the broader pattern cycle to provide our guidance.
Looking back, we realize that price has returned to the
beginning of the original reversal and stands right at a
potential double top. Smart traders never buy into a double top.
But we should not sell short at this level either since the
uptrend remains well intact. Our best tactic is to pause and let
the market tell us what will happen next. Through the balance of
the session, INTU sketches a narrow consolidation flag. Here at
the end of the week, the broad 60-min chart resembles a classic
cup and handle pattern.
Should we now buy or sell? Let's wait for Monday and see what
the market tells us to do.