1-2-3 Trend Reversal Watch

Traders must have patience as “we” look to capitalize on the 1-2-3 pattern. Using the chart samples below (real time 1-2-3 pattern confirmations), we can see that the typical setup takes anywhere from 4-6 months to confirm. Continue to follow me on Twitter as I will be highlighting the dozens of potential candidates over the next several weeks.

I can’t say that all or even if many will confirm but if the major indices confirm the pattern, it will be like taking candy from a baby on the short side. As you may know, nearly 75% of the stocks in the market follow or move in the same direction as the overall indices.

This could get fun. I am currently looking for a short term bounce in the general market and the stocks on my “short” watch list (point #2 confirmation). After point #2 forms, we then start to load up (on the action watch list) and look to short upon confirmation.

Recent posts reviewing the 1-2-3 Pattern:

Two sample stocks confirming the 1-2-3 pattern and two starting to confirm the pattern: MSTR, PKX, ADBE and TECD

060810_MSTR_wkly

060810_PKX_wkly

060810_ADBE_wkly

060810_TECD_wkly

Notable stocks with the 1-2-3 pattern potentially forming:
MA, V, GOOG

Stocks with their 10-week moving average crossing below their 30-week moving average (this week):
NBL, JNJ, AGU, BBL, HPQ, SNN, UNF, MAN, ACN, HMC, MR, MEE, DWA, PEGA, ASML, CE, MSFT

Comments

  1. James Oakes says:

    Thank you for sharing your knowledge with the rest of us. Extremely helpful.

    Was looking at WDC, and was curious as to what you think, as it relates to a possible 1-2-3 trend reversal confirmation. If there is a confirmation, did the short signal occur at 37.63?

    Once again, thank you.

    Jim

  2. Hi Chris,

    1-2-3 Reversals are interesting. Have you thought about writing about 1-2-3 Continuation patterns? I know two guys who trade them and rave about them. One advantage is that you are working with the trend … I wonder what is the frequency of occurance of the reversals vs. continuations?

    Brooks

  3. James,

    Yes, WDC has confirmed the pattern. You could say $37.63 and then again at $36.22. Now the short entry is a failed attempt to recover the 10-wk MA.

  4. Brooks,

    Not in this market with the number of 1-2-3 patterns reversing. The continuation patterns were taking place 2-6 months ago.

    The frequency depends on the overall health of the market.

  5. Chris,

    A couple of questions in the trend reversal pattern.
    -Do you intitiate shorts on individual stocks once the major indexes confirm a trend reversal? I would think this would be safer.

    -In the case of $SPY, it appears there may be a minor low just below 105(if it holds). If not we will need to wait until this minor low is established.. Then we would need the $SPY to rally(point 2) and then drop below the minor low support line. The line would be point # 3. If so it appears more time will need to pass before $SPY confirms a new reversal. Any thoughts?

  6. Paul,

    Not all stocks move in tandem with the major indices so you can trade the pattern before the DOW, S&P or NASDAQ confirms the pattern. However, you are correct that the odds of success rise when the market is leading the pattern.

    About 1/4 of all stocks will complete the pattern before the overall market.

    You are right on with $SPY. The pattern may take another 2 months to form before confirming.

    Patience!

  7. Chris,

    Let’s say you execute a trade at point 3. Could you walk me through that step. Would it be just the opposite?

  8. I meant to ask when do you know when to sell? A reversal to the upside again?

  9. Paul,

    Yes, you sell on a reversal to the upside of the point #3 resistance. Set the stop a few % above your entry and keep an eye on volume. With low volume, you may want to “wait and see”. Don’t let the loss grow more than 7% or so.

    I’ll put a sample up on the blog in the coming week.

  10. Chris,

    I am wondering if you could also comment on the proper drawing of a trendline. I purchased one of Trader Vic’s books and have to admit his explanation is a little confusing. Maybe you have commented on this in one of your past posts. If so please direct me to the correct location.

    Thanks for your help

  11. Paul,

    I’ll see if I can post a visual up with the trend-line with an explanation. It’s essentially the low point at the start of the trend and the low prior to the highest high. Those two points connect the beginning and end.

  12. Chris,

    I started viewing your website and am very interested in your approach. Sorry I am asking so many questions. On the matter of stops, is it not possible for a stock to gap and bypass our stops set at a certain level? This would be a concern in term of trimming losses.

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