Trade in the direction of the open-ing price. If athe prices are below the openingPrice, look for (,618) or (.786) intraday rally toget short. If prices are above the openingPrice, look for a (.618) or (.786) to get long,Larry Pesavento
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Entry Techniques
Here are some of my favorite entry tech-niques used in conjunction with the geometricpatterns They are listed in their order of im-portance (importance to me!)
The Shapiro IterationDescribed in the following pages.
Limit Orders
Placed a few ticks above or below the ex-act geometric price measurements. A prede-termined stop loss (approxiamtely $600) isplaced at the same time.
Candlestick Patterns
These patterns graphically display theimportance of the trading range for that timeemphazing the opening price. Here are four fa-vorite patterns:
Tweezers—This formation is theequivalent of a double bottom.Tweezers occur when 2 lineshave equal highs or lows in suc-
market players—bulls andbears—are nervous.
Hammers —The hammer is a pe-
riod when the market has metstrong support after a sharp selloff. It gets its name from “ham-mering out a bottom.” A ham-mer should be twice the lengthof the candle. Hammer shouldbe esthetically easy to see. Ifyou have a doubt, it is probablynot a hammer.
Shooting Stara—These are accom-
panied by an upside gap on theopening with the market closingnear the lower end of the trad-ing range. These are particularlyuseful entry techniques at theend of the geomtetric pattern.They appear as the opposite ofthe hanging man,
cession, They help to quantifyTisk at the completion of thegeometric patterns
Dojis—The market opened and
closed at the same price aftermaking the highs and lows.They occur when the market isin transition from bullish tobearish mode or vice versa,Doji’s are even more importantat the end of a geometric pat-tern. This is also true when theyoccur after very volatile mar-kets. It is a sign that all of the
Many other candlestick patterns may behelpful as well. | only use these four becausethey seem to go hand-in-hand with the geo-metric patterns.Larry Pesavento
——{=>__E__———
The Shapiro Iteration
When I day trade and use only one calcu-lation to decide on an entry or exit value, I ap-ply what I like to call the “Shapiro Iteration”before putting on the trade. It involves waitingone bar value of whatever the time value is ofthe chart | am using to decide on the trade. Forexample, I wait five minutes if I am using afive minute chart to make trading decisions, 30minutes if 1 am using a 30 minute chart, etc. Itwas proposed by Steve Shapiro one day afterthe market went against him, literally almostbefore he had put the phone back into itscradle after placing an order. Like the rest ofus, he too, has made decisions using emotionrather than logic more times than he cares toadmit. Since we bagan applying it, the tech-nique has saved both of us a great deal ofmoney. There is more than one lesson in hisexplanation of what he calls his "Five MinuteRule,” but what I call the “Shapiro Iteration.”
The most difficult thing for any trader todo is isolate the emotional part of his thinkingand keep it from interfering with his trading,One of the best ways to accomplish this task isto plan and place both the entry point andprice objective before you make the trade.
Including both of these price points witha stop loss when you place your original orderwill reduce the emotional element of trading.The problem with this concept is that, forwhatever reason, most traders simply cannotoperate this mechanically.
It is necessary, therefore, to be realisticand try to develop a safety valve that can pro-tect us from ourselves if we cannot behave thisrationally. The closest concept to a fail-saferule I have found to use in the heat of tradingis the "Shapiro Iteration" or “Five MinuteRule.”
When a decision to put on a trade is
made during market hours, it is often made onthe basis of only one calculation, rather thanthe more reliable confirmation of a number ofdecisions drawing the same or similar conclu-sions about price.
Many times as we sit and watch thescreen we experience the urge to make a tradebecause it is beginning to move in the direc-tion we anticipated, We saw the trade beforethe move began, but for some reason did notput it on.
As the price moves our way, and particu-larly if it begins to accelerate, there is an emo-tional surge we experience that comes fromacombination of being right about the trade,and feeling indecisive about not putting it on,as well as guilty/angry about losing the profit,It is precisely this eagerness to still want to“hop on the train before it gets too far from theStation” that usually gets us in trouble. Unlessthe price action suddenly slows down drasti-cally, or reverses altogether, the emotionalsurge will continue to swell and many timeswe will put on the trade, even though we logi-cally know it is not the best course of action.
The result is too often what appears to bethe vengeance of the trading gods. We have allhad the experience of struggling with our-selves about placing such an order, and whenwe finally make the decision to do it, almost assoon as we put the phone back in the cradlethe price action changes. We almost believethat the market was active and alive and justwaiting for the exact moment we put on ourone Or two contracts to reverse the pricemovement.
It is especially important at these timesto remember that when this happens, the mar-ket is not alive or right or wrong, and it is notpunishing us for doing the wrong thing. Themarket simply and always just is, It is we whoare right or wrong. It is we who punish our-Stock Trading Using Pattern Recognition and Geometric Ratios
selves for anger, or greed or indecision or notdoing our homework.
After acting more times than I care to ad-mit on this emotional impulse to place theright trade at the wrong time, a very simpleconclusion presented itself. Because the timebetween actually putting on the trade and thetime the market seemed to reverse was sosmall, (often it seemed to happen simulta-neously no matter how hard I tried to “out-Smart" or “beat* the market), the only logicalway to deal with this seemingly insurmount-able temptation was to write down the exacttime and price when I finally decided to makethe trade, and force myself to wait atleast five minutes, 300 seconds, before actuallyinitiating it.
The logic was elegant in its simplicity. Ifthe trading gods really were waiting in ambushfor my emotions to drive me to make the tradeat exactly the wrong moment, in five minutesI would observe a noticeable change in trendin the price action, proof that I should nothave put on the trade,
When this is the case, the amount savedusually turns out to be substantial, This is truefor two reasons. First, when the price reversesafter a fast move in one direction, it is often anequally speedy and sizable retracement of theprevious move, If I placed a close stop to limitthe loss, it is usually hit rather quickly. If aStop was not put on, it became a destructivegame of playing catch up and possibly letting asmall loss that should not have occurred in thefirst place develop into a larger loss. When thishappens your focus usually follows the loss in-stead of looking for another profitable situation.
If, in fact, the trade still looked good fiveminutes after my emotions told me I couldn'twait a minute longer, then all ! did was lose alittle of the profit that was still to be made, Ineither case the net is still a gain.
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Stock Trading Using Pattern Recognition and Geometric RatiosLarry Pesavento
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It's Different This Time...
The shoeshine boys have computers and are trading stock on the internet
The legendary Joe Kennedy reportedly saidthat one of the primary reasons he sold hisentire stock position in August of 1929 was thefact that the shoeshine boys were giving thestock tips, All one has to do today is get on anyone of the hundreds of chat rooms on theinternet and you will be totally amazed atwhat is said. It is so absurd that I'm sure thereis not more than a handful of knowledgeableinvestors/traders contributing on the net. Thenet surfers seem to thrive on rumor andinuendos,
The internet has brought financial infor-mation to the fingertips of any investor—andwith lightning speed. Reuter's Instinet is a vir-tual private cyberspace. No one really seemsto understand what really happens there and itis not under the watchful eye of the S.E.C. Vol-ume figures are very hard (if not impossible)to ascertain. Soon after any late breaking newsitem or earnings report is reported by finan-cial television channel CNBC, the reportergives the indication that the stock is up ordown but with the caveat, “it is very thin trad-ing* on instinet. In my opinion, the use andapplication of the internet is where televisionwas in the 1950s. It will continue to be an in-fluential factor in Wall Street and around theworld, It will only get better. The abuses thatoccur will, hopefully, be manageable. But, restassured, there will be abuses—and they will bethe feature of the evening news program.
The 1987 Oliver Stone movie, “WallStreet,” is the fictitious account of financierGordon Gekko's shady financial dealing (i.e.,trading on inside information). It’s ironic thatthe film was made in 1987 and it starts withFrank Sinatra singing “Fly Me to the Moon."
One sequence in the movie depicts GordonGekko talking on the phone with the eageryoung broker, Bud Fox. Gekko tells the hopefulprotege to buy up Teldar stock. He then tellsFox to call the Wall Street Chronicle (fictionalnewspaper) and ask for extension 197. “Whenthe man answers,” he says, “tell him ‘BlueHorseshoe loves Teldar’ and then hang up thephone.”
Gordon Gekko has now taken a backseatto the financial news rooms and cyberspace.Money Magazine had an article in the June1998 issue relating how the internet surfetsoperate.
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I spent several trading hours in a level ILNASDAQ trading room, They specialize inSmall Order Execution System (S.O.E.S.) trad-ing. Traders typically trade 500-1000 shares ofstock looking for profits of eights and quarters,trading 50-100 times per day, Traders in the104
Larry Pesavento
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room have access to about 20 monitors (21-inch color) that give current bids/ask on anystock and the amounts offered. It is a simpleprocess of clicking a mouse button to enter atrade and receive instant confirmation. Assoon as the stock moves up a quarter point,the mouse button clicks again and the traderhas taken a one-quarter point profit (1000shares x $.25 = $250, less a $15 commission).The more he trades, the less commission hepays. On the day I was observing, the StockMarket was very strong in all sectors and veryfew stocks were down. Just before the open-ing, CNBC's Squak Box program announcedthat Platinum Entertainment was going to of-fer music tapes and CDs on the internet. Oneof the traders, a young man in his early 20s,dressed in a tank top and shorts, stood up andshouted, “Blue Horseshoe loves PTET." Thehuge entertainment television had the infor-mation being released and the sound wasturned up very loud. The energy level in theroom was approching Super mBow! levels.PTET closed at $7.50/share on July 14th withaverage an daily volume of 45,000 shares. Itopened at $8.50/share. As soon as the stock hit$9/share, the noise level in the room eploded.Mouse buttons clicked as the traders bought.PTET moved staright up to $11/share in thenext five minutes, A young Oriental woman inher late 20s proudly stated that she had fiveprofitable trades during that run. The stockstopped going up in the next 15 minutes andfell back to $9.75/share. Noise in the room haddropped to near normal levels. PTET suddenlyjumped $1.50/share to go above $11. Thewhole process was repeated again. All the trad-ers bought as the stock quickly moved to $13/share which is the high of the day. Now theexcitement levels are thunderous. Some of thetraders were still buying, but most of thosetrades are breakevens or losses, These were all
day trades. Subsequently, PTET fell back to$8/share over the next few days. The play wasover—at least for then!
Source Media was the next stock thatcame into play. CNBC once again announcedthat the internet company had some an-nouncement pending—a potential buy out can-didate! SCRM opened at $21 and moved to $25in the first two hours of trading, but it wentsideways for about an hour at $24/share, In aninstant, the stock exploded and in ten minutesit was trading at $30/share. Volume was about20 times normal, running at over six millionshares. The large screen television flashed anews announcement on Source Media!NASDAQ had halted trading in SRCM pendingan investigation, The stock had sold off to $25just before trading was halted. After a two-hour halt, trading was resumed! No announce-ment from NASDAQ was forthcoming, Thestock shot up from its reopening price at $30($5 higher than before it was halted), It wentto $39/share in the next ten minutes with onlyan occasional downtick. Only a handful of thetraders in the office were involved in the fren-zied buying spree. The stock subsequentlydropped back to $20/share, 
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Advanced Tissue Sciences was men-tioned on CNBC's Squak Box before the open-ing. Blue Horseshoe shouted that ATIS was inplay. The chart of ATIS popped up on the largecolor monitors around the trading floor, Trad-ers anxiously awaited the opening of the stockmarket. Advanced Tissue opened at just under$4/share and moved to $5.50/share in lessthan an hour. None of the traders had lostmoney. Euphoria reigned supreme.
Mindspring Enterprises, one of the fewinternet stocks that are making money, wasrumored to be a potential buyont candidate.But, there was not the same electricity or en-ergy in the trading room as there was with theprevious "Blue Horseshoe plays.” Then it hitme: This was a very high-priced issue and thetrading firm did not allow undermarginal ac-counts to trade heavily. Mindspring openedhigher and immediately moved ten pointshigher, On a percentage basis, this was a verysmall move on such a high-priced stock.
One of my most vivid memories of theearly 1970s was waiting in line to get gas forthe cars. The lines were long and everyonewas impatient. It was during one of these en-counters that I heard on the car radio that theprice of a New York City taxicab medallion ex-ceeded the price of a seat on the New YorkStock Exchange (approximately $250,000). Asabroker at Drexel, I was well aware that youcould not get anyone to buy any stock afterthe last bear market of 1973-74. Real estate andcommodities were the biggest games in town.
Now it is 1998 and there are more mutualfunds (by a large margin) than there are stockslisted at the New York Stock Exchange! Finan-cial Radio and television programs are every-where and broadcast 24 hours a day. The WallStreet Journal and Barrons are three times thethickness of the same publications in the1970s! Investor's Business Daily has been a wel-
come addition to the financial community.The average daily volume on the NYSE regu-larly exceeds 500 million shares. I can remem-ber a time in 1969, at the Walston & Co. officein San Luis Obispo, California, when the mar-ket traded over five million shares in one day,One of the physicians in town sold a block ofAmerican South African ADRs (50,000 shares)and we watched it cross the Bunko-Ramobroad tape in the office. We all cheered!
The stocks of that era that were thenewsmakers were International Chemical andNuclear, Computer Science, Memorex and Na-tional Video. Computer Sciences was particu-larly interesting because I had met thefounder, Fletcher Jones, in Solvang, Californiaand he told me the computer age was justStarting. I had the “inside* information in1969. Jones was killed a few short years lateras he tried to land his private jet at theSolvang airport on a foggy night. He landed atthe foot of a small mountain. This mountainwould later become famous as the the site ofNancy and Ronald Regan’s Western WhiteHouse. Native Chumash Indians refer to thesmall mountain as camino de cielo—the road toheaven.
Returning to the current “mania" in theinternet stocks, Maria Bartaromo, one of myfavorites on CNBC, was interviewing one ofthe members of the NYSE, This is a a regular