Trader’s Narrative

Here’s a short video from Adam Hewison going over the intra-day 15 minute chart of the S&P 500 Index (SPX). Watch it, then read my comments below:

As Adam mentions this is a very common pattern. The way I would trade it would be to go short as price comes back up from below to the resistance level (the level which used to be support but was broken to the downside).

The all important stop loss - never forget it! - would be placed in the middle of the two extremes, say around 835. And the target, as mentioned in the video would be 812.

My logic is that a breakdown rarely happens without a retracement. So I’m trying to enter into this shallow retracement, which may even take price above the new resistance line. But if the double top is valid, then price will break down anew. As well, I would be short because of all the myriad reasons I’ve outlined in the past few days on where the market is right now. I’m assuming you’ve kept up with the required reading

How would you play this? where would you enter, long or short? and where would your stop loss and targets be?

If you’re interested in patterns, then check out “The Great New Pattern“. And GNP with another specific example (VNT).

Trading is basically about finding and exploiting patterns which don’t change. Why don’t they change? Because we humans, as participants and creators of the market, don’t change.

In a previous post I introduced the Great New Pattern. At that time, I used Accredited Home Lenders (LEND) as an example. I thought I would present a new stock that has shown not one but two instances of panic selling. And why one is the GNP and the other is not.

By the way, a big thank you to Chairman Maoxian who kindly provided the charts.

The stock is the ADR of Compañía Anónima Nacional Teléfonos de Venezuela (VNT) - the national telephone company of Venezuela. The first example happened in earlier this year:

As you can see, it closed down three days in a row and then gapped down massively. This is not really the Great New Pattern because we want to see back to back down days with each one ideally, showing more intense selling. Which is then followed by a crescendo of volume proving that the meltdown is drawing more and more people to sell in a panic.

It is important to look at failures - and not just idealistic examples - when learning a new pattern in order to better be able to distinguish between the two in the future. Anyone who pretends that one can’t learn anything from less than ideal setups is either ignorant or trying to lead you down a garden path.

The second example is VNT in 2005:

This one fits much better with the Great New Pattern playbook. In fact, its almost perfect. The only thing missing is the volume pattern.

So lets see. In late July 2005 VNT falls off a cliff. It gaps down some but the prices close strongly lower with wide ranging bars. Volume picks up with each successive down day with the spike corresponding to the most wide range day in the chart. Finally selling subsides when in early August we see the first candle close up in what looks like a wide range hammer.

After that, volume recedes while price recovers nicely. And that’s the Great New Pattern!

By the way, if you try to punch up VNT on your charting platform, you’ll probably get an error. This is because the megalomaniacal Chavez nationalized Compañía Anónima Nacional Teléfonos de Venezuela (caNTV). On May 9th 2007, the NYSE reacted by halting and then delisting the ADR shares of VNT which represented 7 regular shares on the Venezuelan stock exchange.

Similar to the GNP, another blogger (Stock Monster) trades what he calls ‘Rockets’: stocks that are down two days in a row. He doesn’t reveal the exact filter but it isn’t “rocket” science to come up with one - couldn’t resist