3D Trade Execution
Short-term traders often focus on large elements of the pattern cycle and miss important signals buried within intraday price movement. This relativity error forces them to wait on the sidelines until these major swing points are reached and participants from broader time frames enter the game. Rather than wait, traders can locate good setups by reading reversal and breakout patterns within very short periods of cyclical market movement.
Chart analysis works best when several time frames are combined to identify important swing points and breakouts. But once the short-term trader identifies the broad framework of support and resistance, profits come from predicting how the next few minutes or hours of market action will play out.
Let's trade through a small pattern cycle following a powerful Intuit (INTU) rally.
As INTU slowly pulled out of a 9-month base in mid-October, few realized it was headed into a quick price triple. Typically, short-term traders become aware of dynamic rallies very late in their development. The majority then engages in momentum strategies to chase the big move. But risk is very high at this stage of the broader pattern cycle. As stocks go parabolic, traders get caught in sharp downdrafts that empty pockets as quickly as they are filled.
Smart technicians use major reversals, such as the one INTU printed at 60, to signal the start of predictable swing trading conditions. The downswing generates fear and provides a perfect environment for well-defined pattern and support-resistance formation. But don't rush into poorly defined entries. Be patient and wait for the right opportunities to develop.
While good short sales print on the downdraft, we'll concentrate on going long with the uptrend. A large crowd always misses the boat on strong rallies and sees any pullback as a good entry. Our first job will be to wait until a bottom pattern prints and then join them. This can occur in a few minutes but routinely takes several days to form on a typical 15-min or 60-min chart.
We are fortunate with INTU. The appearance of a symmetrical triangle quickly defines a possible bottom and clear breakout point. Note how our bottom support line actually violates the 11/30 low. The markets rarely offer perfection on very short-term patterns. Traders must be skilled enough to draw useful trendlines based on limited and conflicting information. If we have done our drawing well, the gap on the morning of the 2nd will be immediately recognized as a breakout from that triangle and completion of the bottom reversal pattern.
The market does not give away its gifts easily. Traders that buy the INTU morning gap face considerable whipsaw action until the lunch hour. Note the common 3rd bar reversal just 10 minutes after the market opens. This sets the stage for traders to apply a simple 1st hour range breakout strategy and look for an entry just above the reversal high.
The pattern also offers swing traders safe entry on both the first test of the morning gap and the double bottom test later that morning. However those that enter at bottom support then risk considerable profit if they choose to hold to new highs. Exit this classic swing trade just before the top of the first hour range and consider the setup for a new breakout trade on its own merits.
The safest breakout entry takes place just minutes before the move above the morning highs. But how will the trader know to buy? A well-trained eye recognizes the small cup action of the tall bar just prior to the breakout. The morning pattern gives up its secret here, leaving the smart trader with 2-3 minutes to enter quietly at the bid through a favorite ECN. Also note the small ascending triangle just above the breakout point. New breakouts typically pause for 4-6 bars before momentum shoots out in a tall candlestick.
The next morning opens with a powerful opportunity for traders. It takes very strong demand to break the rising trendline of a price channel. For this reason, channel breaks often produce very tall price bars immediately following the initial signal. Note how much of the break takes place in the first 30 minutes of trading. This offers a very small window for the trader to get on board safely.
INTU pattern cycles shift back and forth through charts of different time frames. If you get lazy and only focus your attention on a single segment, your level II screen may flash a breakout but you won't understand the source or reason. Without the right information, odds increase that you'll jump in at the wrong time and buy a top or sell a bottom.
Good traders know when to stand aside. As INTU approaches 60, long side trades become very risky. But after the strong momentum of the opening move, shouldn't we expect another long thrust after a short pullback? At this point, our strategy relies on the broader pattern cycle to provide our guidance. Looking back, we realize that price has returned to the beginning of the original reversal and stands right at a potential double top. Smart traders never buy into a double top.
But we should not sell short at this level either since the uptrend remains well intact. Our best tactic is to pause and let the market tell us what will happen next. Through the balance of the session, INTU sketches a narrow consolidation flag. Here at the end of the week, the broad 60-min chart resembles a classic cup and handle pattern.
Should we now buy or sell? Let's wait for Monday and see what the market tells us to do.