Most traders are familiar with trading chart patterns and its
predictable targets and stops. When patterns fail to reach the
pre-determined target levels the pattern becomes a 'Failed Pattern.'
There are multiple categories of 'Chart Patterns Failure' but we may
get to them in another blog post.
'Failure' word sounds painful but understanding the knowledge and potential
opportunity it offers and its risk/reward, traders could use 'Pattern Failure'
to their advantage and benefit from it. 'Failed Patterns' provide more reliable signals
than original 'patterns' in most conditions.
In this example, I would like to discuss current (Jan. 2016) Dow Jones Transportation Index ($TRAN)
Inv. Head & Shoulders pattern.
Most of the year 2015, $TRAN (Transport Index) were relatively flat to downtrend mode
agreeing with market theory that Transports lead market indexes. From April 2015
to Dec. 2015, $TRAN formed an Inv. Head and Shoulders Pattern. When I first saw its
formation in late Aug. 2015, I was certain Market indexes are
going to rise to new highs by the end of 2015, thinking Inv. HS would
breakout above Neckline 8320 and rise higher. In Nov. 2015, $TRAN did
breakout above Neckline 8320, but not closed above Neckline. Usually multiple
closes above Neckline signals a confirmation of breakout.
A break above Neckline but no close "SHOULD" have been a failure signal.
Well, as most traders, I ignored it and caught up in the "bulllish close for 2015"
fever like many other traders.
Late November 2015, $TRAN started to decline from neckline breakout failure
and started to drift lower. In Head and Shoulders (or Inv. HS) patterns there
are two failure levels. 1. The mid point between the RIght-Shoudler and 2. Neckline
and Right Shoulder High (in case of HS) or Low (in case of InvHS). Once price trades
below or above Right Shoulder High/Low the HS pattern is considered Failed.
Once pattern fails, usually the moves from the failure levels are quick and volatile.
In failed H&S Patterns, the first level of target is set at 100% depth
from the Right Shoulder Low/High.
$TRAN Inv. HS pattern failure shows how $TRAN signaled a market collapse
far ahead of Jan. 2016 collapse. Failed Patterns are indeed
provide great opportunities and traders should pay close attention to them.
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