T2W Trading Community

Targets and Patterns

The purpose of this section is not to explain TA patterns and targets, but to demonstrate how they fit into the 100 EMA trading strategy, to maximise the most out of your trading.  There are numerous other formations, but these are some of the more common formations. Further reading should be sought from the weekly commentary on the bulletin board for more detailed explanations and Q & A’s.

Target calculation is a key tool in your arsenal. Without it, you will be missing a lot of points. The numbers are never exact. Expect to be a few points under or over. In any case, the following example happens to fall on some very convenient numbers. Usually you get odd numbers. When trading, you need to make a quick approximation at first. Then, as the move progresses in your favour, take time out to try and get as exact as you can.  You should always be looking for traditional TA formations, but don’t look too hard. If it doesn't jump out at you, it probably isn't there. Remember, as you have seen, that a move can "develop" into a different formation from that which you originally saw.

Flags

Flags usually have 3 cycles, with the breakout coming off the third cycle to the upside in a bull flag. The reverse is true for Bear Flags.

In Figure 5, the first 3 legs up have targets of 100 points from the lowest price in the pullback. However, rise 4 is only 80 points – this is a clue that it’s weakening. Add this 80 to the low = 8050.

For each leg up, for the move to continue, the price MUST CONFIDENTLY reach the target.  By this I mean no dithering in the middle. (as in the 7860 region). If you reach target, you will soon get a pullback, and then you have 2 choices – close the position, or stay with it. In the final leg (8, 9) the target was 8100, which fell short. But we expected that, didn't we......?

Triangles

Triangles have the same target calculations. Take the “mouth” and add it to the break to the up side, or take it away from the break to the down side. Forget the shape of the triangle - they all mostly work.

Bull Triangles

You take the size of the "mouth" and add it to the trend line at the breakout point. In Figure 6, (as is often the case in a bull triangle) it is the horizontal resistance line. If it breaks to the downside, subtract the mouth value from the support break trend line to get your "short" target. The target is usually met by the time the triangle lines (theoretically) would have reached a point, and the breakout point is usually defined as occurring between 60% and 75% of the distance from the start (mouth) and the theoretical apex. Note there are almost always three cycles in the triangle before the breakout. The 3rd low cycle was at 8270.

You will often get a clue about the direction of the break by looking at RSI and CCI, and also where the 100 EMA line is relative to the body of the triangle. I call this the "balance of power" in the triangle. In this case, the balance was below the 100 EMA, and could have led to a  break to the down side. Here, the final overriding clue was the early small false break to the upside, followed by a dip, not to the support line, and not breaking the 100 EMA. (the middle "confirmation pullback"). Watch out for the false blips!!!!

Bear Triangle

As it's at a top, we expect it to have the balance of power above the 100 EMA. (In the previous example, it was a bottom, so the BOP was below the 100 EMA). The BOP comes into play in a sideways market, where it may give you a clue to the exit direction. Don't guess it!  You already know how big the move will be from the mouth. Just be prepared, and know where the target will be when it goes.

Expanding Triangle

This is a "reverse" or "expanding triangle". These often lead to high volatility. Four days of dithering, followed by one day of massive rise. Same rules, same targets. No doubt, many would have been surprised had they not checked their longer-term timeframes.... BEWARE of these intraday. They are swift, ruthless and will eat you alive!

Pullback

Treat it just like a mini bull / bear flag. The main difference is that it occurs as part of a big push up, where the price needs a breather and the MM’s need to grab back a few shares - so that they can continue to have move shares available as the price moves up.

Typically, you will only get something like 1 - 4 ticks of pullback. In the example here, the pullback is minute, but defined. The target is 8015+ (8015-7980) = 8050.  Note that pullbacks work on the way down too - same rules.

Magic Numbers

The "magic numbers" are 32 and 64.  It is an observation over considerable time, that the Dow frequently has a pause or a minor test at these two numbers. There is no explanation as to why this should be and they occur as if by magic.