Pattern Recognition: What Traders Get Wrong Wrong Wrong

Pattern recognition is the key to becoming a successful chartist. Through practice and experience the best chartists have seen the same pattern thousands of times. It is all about noticing, but what is it that the chartist must notice?

Please retweet if you liked this article! 

Notice the patterns that give you an edge.

Notice the patterns that make you money.

Most importantly, patterns emerge from the past. Yet we must look to the future.

The patterns you see today must make you money in the future. It is of utmost importance that the pattern you trade is adapted to the current environment. A breakout pattern that pattern recognition tells you is exactly like thousands of other successful patterns is meaningless in a range bound market that thwarts eighty percent of breakouts.

Know the pattern, but more importantly know the pattern that works in the current environment.

Subscribe to The Market Speculator by Email and never miss a post! 

If you would like to learn more about how I trade, receive my nightly focus list with market analysis, setups and trade alerts, sign up for a 14 day free trial at BullsonWallStreet.com.

Another Stock Showing Strong Distribution: WYNN

WYNN was on the long list for quite some time, but has now reversed and is the perfect short setup. A bear flag has formed, with volume that's showing distribution. Many like to wait for price to breakdown out of the flag pattern. I prefer to enter early, when price is at the to of the range.

Strategy Session: Using Distribution Patterns to Predict Trends and Trend Failure

The second most important aspect of my trading strategy (behind support and resistance) is using volume to classify stocks that are under accumulation and distribution.

Distribution is under way when, over a period of time, stocks show higher volume on down days and lower volume on up days. In a bullish trend, this predicts the trend will pullback or fail. In a bearish trend, expect the trend to continue until the distribution pattern is reversed.

Take a look at GME. This stock shows classic distribution. During the recent uptrend, positive volume was putrid. Trend failure was easily predicted. Currently, the distribution pattern is continuing. This suggests a retest of recent lows.

I will likely short this stock soon.

4 Stocks For Tuesday

Here are the four stocks I am looking to enter on pullback Tuesday.

SPY Chart

Short Setup: NTRS

I went short NTRS this morning. The stock has broke down below support, pulled back and shows a negative volume pattern.

Focus List Stock: AMZN

I currently only have one position (SPY at $84.03). I'm patiently waiting to add positions on a dip to support. One of my favorites is Amazon, which is consolidating after a monster run and breakout. I'm looking to enter on a pullback to the $80-81 range.

Spy Chart

I currently have only one positions (SPY at $84.03). The chart below show looming resistance levels, which correspond with my targets.

A Momentum Stock in a Sea of Bottoming Setups

NFLX is one of the few stocks that has been enfuego this year. It bottomed in December and has been on fire since. I like it on a pullback to the mid Bollinger Band level, which is also the 20 day moving average.

This is a trend pullback setup.

Breakout Stock: CTRN

During big down days, it pays to watch for stocks holding up well. CTRN, a recent breakout stocks, is doing just that.

SPY Chart

Definite Change in Market Character

Today marked a change in character for the market. SPY has now convincingly mounted the 50 day moving average, the volume pattern shows accumulation, RSI is steady above 50 and the price bar is of the "breakout" variety.

I'll be looking for a pullback to initiate longs.

Chart: ACOR

ACOR is the only new addition to the focus list:

SPY Chart

The Gold Short: AEM

The short gold trade I mentioned yesterday is working great so far. I entered AEM at $49.80.

Short Setups in the Even of a Bounce

If the market gives us a multi-day bounce, I would like to use it to initiate a few short positions. I am currently watching broken stocks that are bouncing towards resistance levels. ALXN is a good example. A few days of bounce would put it near the 50 day moving average and broken trendline. This would provide a low risk, easily managed short setup.

One of My Favorite Entries: MOS

Low Risk, Average Probability Setup

Energy Looks Good: PBR

Energy stocks are showing good accumulation patterns while coming off bottom price patterns. Of the energies that I monitor, PBR is showing the best relative strength compared to the sector. It is at 30 day highs.  I'd like to enter on pullback to support.

Trade Setup: USO

As noted yesterday, I entered USO at $28.32.

Setup: Oversold bounce, possible bottom formation. Stochastics are extremely oversold, which has provided for quick counter trend trades with this stock.

Risk: My stop is under price support around $26.50, with the 50 day moving average providing the initial target at $33.50. This gives me a 3:1 reward to risk ratio.