<s> Stocks & Commodities V. 9:5 (197-201): Form And Pattern As A Trading Tool by Robert Miner
Form And Pattern As A Trading Toolby Robert Miner
P
attern recognition has been the topic of much technical literature. From the Elliott wave theory to
Edwards and Magee, traders have been told that some fairly well-defined chart patterns indicate themarket's position and the most likely outcome of the ensuing market activity, as indicated from aparticular chart pattern. While it is important for every trader to be familiar with traditional chart patternsthat have been found to be reliable indications of the market position, it is also important for the trader toanalyze any individual market for the way in which it unfolds in bull or bear cycles and for patternsunique to that market. A trader will find that for every unique market there is often a form in which acycle will unfold and there is a chart pattern of activity that develops at important junctures.MASTER OF THE GAMEIf a trader is to be successful, he should master every market he intends to trade by relentlessly analyzingthat market from every perspective for as far back as data are available. There is no excuse not to beintimately familiar with a market and its peculiarities, as the data for every market as well as charting andanalysis software are easily available.The trader must always keep in mind several concepts to make the right decision:1. Market activity must be viewed from all perspectives and relationships: time, price, position andpattern. No single aspect of market activity can be viewed out of context of the other dimensions.2. The trader must have a firm idea of the market's position in comparison with the long-, intermediateand short-term trends. The trader must recognize whether the market is in a position of strength orweakness or near a termination of a trend.3. The trader must have a well-defined trading plan that reflects his trading goals.4. The trader must have specific trading strategies to take advantage of his knowledge of the market andits position to fulfill his trading plan.
Article Text
Copyright (c) Technical Analysis Inc.
1
Stocks & Commodities V. 9:5 (197-201): Form And Pattern As A Trading Tool by Robert Miner
Now look at the Treasury bond market to discover how an analysis of the form and pattern of thatparticular market would give us usable information to make profitable trading decisions. First, look at thehistory of the Treasury bond market to see what we would learn from the history of the market's form andpattern as they unfold.Note the form and pattern of the 1981-86 bull market (Figure 1). From the September 1981 low, themarket made a strong advance into the May 1983 high. Note the nature of market activity at that high.The initial high was made in November 1982. Six months later, in May 1983, the market exceeded theNovember high slightly and then sharply declined, closing the month near monthly lows and resulting inan outside reversal month.Then, the market continued to decline into the July 1984 low. From the 1984 low, the market made tworelatively short advancing swings, making the highs in January and June 1985. The June 1985 swing hightopped slightly above the swing high of May 1983 before consolidating for four months. In November1985, price broke decisively above the resistance level, with a monthly close above the prior swing highsof June 1985 and May 1983 and closing near the high of the month. The market continued to advancestrongly into the extreme high of April 1986.TRIANGLE CONSOLIDATIONFrom the April 1986 high, the market consolidated for 11 months in a triangle pattern, never able toexceed either the extreme April 1986 high or even the first corrective high of August 1986. In March1987, the market made an attempt at the August 1986 swing high but closed down near the low of themonth in an outside reversal month. From that decisive failure to advance, the market declined sharplythe following month below swing and consolidation support levels, confirming that April 1986 was likelyto be the termination of the bull campaign and that the market was likely to either correct the advancefrom the July 1984 low or the entire bull market from the September 1981 low.
If we examine the activity from the weekly chart perspective, wesee that there really was little difference between the campaignand the monthly chart.It is important to review the market activity at this point to see what can be learned of the nature of thebond market for this bull campaign: The first rally swing was strong, more so than a normal corrective countertrend swing if the bearmarket was to continue (9/81 - 11/82). The extreme top of the initial advance was made after a six-month consolidation period, with the finalhigh (5/83) only slightly exceeding the prior high on an outside reversal month — that is, the marketattempted once more to continue to new highs after a prolonged period of consolidation but failed andbegan to decline sharply. The failure to fulfill the higher prices expected after a prolonged periodresulted in a capitulation of those expectations and sharply lower prices. From the 1984 low, price made two relatively short advancing swings into the obvious resistance levelof the prior swing high. Once again, price slightly exceeded the perceived resistance (6/85), only tofail and then enter a consolidation of several months near that resistance level. Price had now made
Article Text
Copyright (c) Technical Analysis Inc.
2
Stocks & Commodities V. 9:5 (197-201): Form And Pattern As A Trading Tool by Robert Miner
three attempts at the same resistance level. On the fourth attempt (11/85), price broke out sharply above the triple top in a breakout that resulted ina sharp advance to new highs. Keep in mind my rule of four: "At the fourth attempt of support orresistance, a major decision will be made. A failure to continue the trend will usually result in a sharpcountertrend move. A successful breakout will usually result in an accelerated, high momentum trendswing." To a lesser extent, this is true on the third attempt or the challenge of a double top or bottom. Following the April 1986 high, price again underwent a fairly tight triangular consolidation period ofalmost a year, never able to exceed the extreme high. Expectations and frustrations were againbuilding over time. The final capitulation was again preceded by an outside reversal month, which topped just short of theprior swing high.What is the pattern here? Advance, prolonged consolidation, failure to move through resistance, dramaticdecline at the failure of expectations or dramatic advance at the successful test — a familiar theme. Notethe form of the activity from the October 1987 low. While not an exact repetition of the prior bullcampaign, the general characteristics are similar: Initial strong advance into the February 1988 high,sharp reversal into the August 1988 low, two minor advancing swings, sharp advance on the breakoutand final top made on an outside reversal month of August 1989. The only real difference of the October1987 - August 1989 bull campaign from the monthly chart perspective is that the market did not undergothe prolonged consolidation periods at each important resistance level prior to a countertrend move ortrend breakout.If we examine the activity from the weekly chart perspective, we see that there really was little differencebetween the form and pattern of the 1981 to 1986 bull campaign and the 1987 to 1989 bull campaign(Figure 2). From the February 5, 1988, swing high, the market consolidated at high levels for four weeks,making two more weekly attempts at the high but falling short of that high and closing each week belowmidrange, a sign of weakness. The capitulation came when the market made a strong decline below theminor swing low, closing near the low of the week. From the corrective low of August 16, 1988, themarket made two minor advancing swings, the weeks of 11/1/88 and 1/27/89. The second advancingswing only slightly exceeded the resistance of the first on an intraweek basis.The third attempt at this resistance level was made the week of May 19, 1989, on a strong break of thedouble top with a close above the resistance swing highs and near the high of the week. Following thisbreakout of important resistance, the market accelerated the advance in the same manner as the breakoutin November 1985 (Figure 1) following two minor advancing swings. A new high for this bull swing wasmade August 1, 1989, on a very wide range reversal week with a close at the low of the weekly range.The ensuing price activity should look familiar, as it underwent the same general form as the activityafter the April 1986 top.CLEAR RECOGNITIONNow take the analysis up to the latter part of 1989. At that point, the trader should have clearlyrecognized that the bull campaign from the October 1987 low was unfolding in the same general patternas the bull campaign from the 1981 low into the 1986 top. The bond market exhibited similar patterncharacteristics at important resistance levels.
Article Text
Copyright (c) Technical Analysis Inc.
3
Stocks & Commodities V. 9:5 (197-201): Form And Pattern As A Trading Tool by Robert Miner
In the latter part of 1989, we can suspect the market was in a position similar to the market following the1986 high. If the form of the market activity was to be fulfilled in the same manner as the activityfollowing the 1986 high, the trader could anticipate the August 1989 high would not be exceeded and,once the market did finally break below the consolidation levels, a sharp decline would probably followthat would either correct the advance from the August 1988 low or from the October 1987 low. However,markets do not always fulfill our expectations, which is why we must have trading strategies thatincorporate the shorter-term price patterns as well as the time dimension.The daily chart clearly demonstrates the blowoff top into the August 1, 1989, high (Figure 3). This topwas preceded by a sharp advance to new highs that culminated in an exhaustion gap on August 1 and aclose below the gap two days later that confirmed the top. The market then made a typical ABC-typecorrection, followed by another sharp rally that tested the August 1 high. The nature of the test of theAugust 1 high on October 16 was an important clue to the position of the market. On October 16 themarket made a very wide range day, exceeding the August 1 high intraday, but closed near the low of theday, well below the prior swing high resistance level, an indication of weakness at this high price level.For the next two months, the market traded in a tight trading range. While we have identified the marketactivity at this point as being very similar to the pattern from a longer-term perspective of the marketactivity going into and following the April 1986 campaign high, we can never be certain whether this is adistribution period whence prices will eventually make a significant correction or an accumulation periodat major resistance that will be followed by a breakout to significantly higher levels.STRATEGIES AND MEASURESThe trader must use disciplined trading strategies to take advantage of the situation, no matter how itshould unfold. The one thing we can be reasonably sure of is that the bond market is likely to make avery significant move out of this consolidation period. If the market is unfolding in the same manner asthe bull campaign into the 1986 top, which appears to be the case, we should look for opportunities toshort the market at resistance as well as at the breakout below the trading range/consolidation. If themarket continues higher, it will probably do so dramatically, as it exceeds a level of resistance that hasbeen tested several times in the past four to five months. If that scenario were to unfold, we would buy aconfirmed breakout of resistance or a close above the August 1 swing high. The trader will takeadvantage of whatever situation unfolds regardless of what he believes should unfold.As of late December, the market had made three attempts at resistance: August 1, October 16 andNovember 16. The rule of four states that the fourth attempt is likely to result in a dramatic change,breakout or failure.TIME ANALYSISThe time analysis has indicated that the week of December 19 (12/17-18 = weekend) is an importantprojected turning point period (PTPP), which has a high degree of probability of change. I use atechnique called Time Cycle Ratio (TCR) analysis to project turning point periods. This analysis is basedon Fibonacci ratios of day counts between past turning points in the market. I count the number of daysbetween turning points, multiply the result by a number from the Fibonacci series and add this amount tothe last turning point. This period had a large cluster of important time factors, including:December 17 = 1.618 TCR 10/19/87L-8/16/88L
Article Text
Copyright (c) Technical Analysis Inc.
4
Stocks & Commodities V. 9:5 (197-201): Form And Pattern As A Trading Tool by Robert Miner
December 17 = 1.5 TCR 8/1/89H-9/26/89LDecember 20 = 60 trading days (TD) 9/26/89LDecember 21 = 2 TCR 8/16/88L-1/27/89HDecember 22 = 1.618 TCR 8/1/89H-9/26/89LDecember 23 = 144 calendar days (CD) 8/1/89HThe trading strategy involves entering the market counter to the short-term trend going into the PTPP ifthe market is at a support or resistance level and the daily price activity indicates reversal. In short, whentime, price and pattern coincide, action should be taken.Going into the PTPP of the week of December 19, the short-term trend was clearly up. The market wasmaking a fourth attempt at a very strong resistance zone. On December 20, price exceeded the immediatetrading range high of November 16 intraday but closed below this resistance level near the low of theday, a sign of weakness. Note how often bonds approach or slightly exceed important resistance levels atfinal tops, yet fail to close above that resistance level. But in this case, time, price and pattern havecoincided to indicate change. The trading strategy was to sell bonds on the close on December 20 at thisimportant coincidence, with a stop and reverse just above the intraday high.TIME, PRICE AND PATTERNWhy a stop and reverse? With such a strong coincidence of time, price and pattern activity from a longand short-term view indicating important change, a failure to complete the pattern by continuing toadvance would indicate a very strong rally swing was likely to develop. Taking advantage of the market'sfailure to unfold as indicated is a powerful trading strategy that allows the trader to position him- orherself for whatever may develop in the market. Keep in mind that action should be taken at an idealsetup of the coincidence of time, price and pattern.The trader can never be certain what the ensuing market activity will be. We have positioned ourselvesfor the most likely outcome, however, and will quickly reverse positions to take advantage of whatevermight unfold. Three days later the market gives us the first confirmation that our analysis and tradingstrategy is likely to pay off, possibly in handsome returns, as the market makes a wide range decline witha close below the trading range low. If the market is to move as anticipated, a significant correction ofeither the August 1988 or October 1987 to August 1989 bull swings will unfold.The final capitulation comes on January 12 as the market again makes a wide range decline and closesbelow the next support level. At this point we know that our analysis of all dimensions of market activityand appropriate trading strategies will pay off.AFTERWORDIt is always easy to analyze a market after the fact and illustrate the relationships and profitable tradingstrategies. I have illustrated how the market can be analyzed beforehand to prepare the trader. The longand short-term pattern of the bond market activity going into late December 1989 indicated well inadvance that the market was making an ideal setup for a major decline based on the characteristics ofprevious tops. The market's failure to unfold as expected would be likely to result in a breakout to newhighs and a significant advance, but whatever might happen, the trader was able to position to take
Article Text
Copyright (c) Technical Analysis Inc.
5
Stocks & Commodities V. 9:5 (197-201): Form And Pattern As A Trading Tool by Robert Miner
advantage of a probable major move by being prepared for when change was likely. The strategy, in fact,took advantage of our knowledge of the position, pattern, time and price analysis of the market activity.A key to successful trading is to have the patience and discipline to take action only when the marketactivity from all perspectives clearly indicates the most probable forthcoming action. Never initiate atrade without a thorough knowledge of the peculiarities of the particular market. When the time, priceand pattern of market activity coincide to indicate change, the trader has the best opportunity for profits.
Taking advantage of the market's failure to unfold allows thetrader to position himself.Every trade will not be profitable, but every trade cab be successful. A trade may result in a loss, but aslong as that loss is minimal and action was taken with reason and purpose in accordance with our tradingplan, the trade is still successful.Robert Miner is a private trader and the author of the W. D. Gann Trading Techniques Home StudyCourse, Gann/Elliott Educators.
Edwards, Robert D., and John Magee [1966]. Technical Analysis of Stock Trends , John Magee Inc.Miner, Robert [1991]. "Price as a trading tool," Technical Analysis of STOCKS & COMMODITIES, Volume 9:April.___ [1991]. "Time as a trading tool," Technical Analysis of STOCKS & COMMODITIES, Volume 9: March.___ [1989]. "Time, price and pattern," Technical Analysis of STOCKS & COMMODITIES, Volume 7: May.
Figures
Copyright (c) Technical Analysis Inc.
6
Stocks & Commodities V. 9:5 (197-201): Form And Pattern As A Trading Tool by Robert Miner
FIGURE 1: During May 1983 the bond market tested resistance a second time and failed to hold thegains, thus signaling a top. In November 1985 the fourth attempt at resistance was successful and apowerful bull market was underway.
Figures
Copyright (c) Technical Analysis Inc.
7
Stocks & Commodities V. 9:5 (197-201): Form And Pattern As A Trading Tool by Robert Miner
FIGURE 2: The market successfully broke through the November 1988 and January 1989 tops on itsthird attempt (May 1989). The price move above the double top did not run its course until August 1989.
Figures
Copyright (c) Technical Analysis Inc.
8
Stocks & Commodities V. 9:5 (197-201): Form And Pattern As A Trading Tool by Robert Miner
FIGURE 3: The August 1989 selloff and the October 16, 1989, reversal day forewarned of the potentialtop.
Figures
Copyright (c) Technical Analysis Inc.
9
<|end|>