Chart of the week
As markets and stocks move higher and then higher again with very little retracement or sideways corrections the potential for breakout failures increase. Because of the surprise or shock to traders playing the breakout, these failures can produce great opportunities for swing-trading over a few days and even higher odds day-trading opportunities. Let’s look at a couple of examples that have happened and some current patterns that may.
As with all Pristine trading patterns, understanding the thought process of traders that created the pattern is an important component to having confidence in the play. The breakout failure pattern is an easy one to understand since everyone has been caught in one at some time in the past. But let’s review it.
As prices are trending higher, traders are waiting for an entry point to get on board the trend. The most popular entry is when prices pullback to a reference point of support. Some traders will use a prior high, a moving average, a percentage of retracement or simply a dollar about. However, when prices move sideways (a very strong tread), rather than retrace, the trader is confronted with the choice of having to buy a breakout. If the breakout results in prices falling back under the breakout bar’s low, the unexpected or shock has happened. What are you going to do?
Breakouts are high odds trading setups and are used profitably in the Pristine Method Trading Room (PMTR) every day. However, they are best used after the initial start of a move. This could be after the first rally from a bottom phase or it could be a gap-trading setup where the gap was a daily Pro-Gap, followed by prices basing for a period of time intra-day. Breakout failures increase when prices have been trending higher for a long time or have moved too far, too fast.
There aren’t a lot of these failures happening yet, but there are a couple that I can show you and a few that might result in failures.
Last week, Deere (DE) broke out above a several day base and at the time it looked like higher prices were a sure thing. However, the next morning DE gapped well below the breakout bar’s low. Can you imagine the shock to traders and fund managers that had bought the breakout the prior day? DE is an example of prices moving too far, too fast. Think about what you would do if you bought DE and it continued to show more weakness. What if you were a fund manager with cash on hand and starting buying a lot more shares of DE, but sellers just kept on dumping, so price barely moved up. Are you feeling it?
In the above chart of Castel Crown Intl. (CCI), the daily time frame actually looked good for a breakout to continue. The base was a reasonable length and it was forming at the top of a Bullish Wide Range Bar (+WRB). However, the weekly was up from its base five-weeks in a row. Now, that doesn’t always mean the breakout could not have worked, but it was lower odds. That being said, the breakout failed when prices broke under the breakout bar’s low. It’s shock-time for the breakout traders, what are you and other traders going to do?
HCN has been moving up on the weekly time frame since the end of last year, and notice that last week’s range was the widest since the move started. In addition, it closed almost at the high of the week; no wick or upper shadow. In other words, buyers were falling over themselves to get these shares after multiple weeks of a straight up run into a weekend. Thinking must be that there is no risk of moving lower. Hum, well maybe that’s true and we’ll see. Friday, HCN broke out above two bars with equal highs. That was a minor stall of course and not what many would consider a base, but this is what strong trends do. If prices break under Friday’s low it will come as a big surprise to those that bought last week.
Universal INS Hldgs. (UVE) has had a big run this year and may move higher still, but right now it looks ripe for a breakout failure. Last week’s range narrowed after the prior week having had a huge range. That signals that the bullish momentum reached an extreme and then slowed. Buyers of UVE are not expecting a move under Friday’s low, so if prices do - the trap will be set.
Lastly, here is a chart of the S&P 500 ETF symbol SPY. It also broke out above two prior days with relatively equal highs Friday. Buyers stepped up all day Friday and when there was no pullback mid-day, they scrambled to buy shares right into the close. Notice the size of last week’s range compared to the prior ones.
If SPY breaks under Friday’s low, it will be a shock to those recent buyers and that is likely to bring in sellers short-term. However, it will not change this bullish uptrend simply because the trend will still be up.
What I have shown you in this Chart of the Week (COTW) is how to recognize one type of failure/shock pattern. Educated short-term day-traders and swing-traders know how to take advantage of these moves when they happen.
If you are holding long in this market for the intermediate-term there is nothing for you to do. That being said, watch to see if there are any breakout failures next week and what happens.
If you’ve been away from the markets or just getting involved, we have a great line up of Free Power Trading Workshops this week. The markets are on fire and there no better time to learn.
PRISTINE - A Trading Style, Often Imitated, But NEVER Matched!
All the best,
President & CEO
Pristine Capital Holdings, Inc.
Good Morning All;
There is a problem that can occur after a student takes a seminar. Most of the students leave with a strong desire to succeed and a strong desire to put what was taught to work. These are both good things. Unfortunately, one of two things frequently occurs.
After the Seminar
First, despite all the enthusiasm from the seminar, sometimes the student falls right back into their old routine. On Monday morning, they never really apply what they learned at the seminar. Hard to believe, but old habits can be hard to break. They do not review and follow-up so the concepts can take root once they are on their own in the real time environment.
The second thing that sometimes occurs is that the student begins to apply the concepts, but does not follow up on the results. They do not go back to review to see if the play was actually based on, and managed by, the concepts taught. Many over look the basics that were taught. One of the most common failures we see is people not properly applying the basic criteria necessary for the set-ups we teach.
Take for example the Pristine Buy Setup. Most students seem to like the criteria for finding the pullbacks, and increasing the effectiveness by looking for some of the reversal signs. Unfortunately, this is not a fair summary of what is actually a very detailed strategy. The most common mistake traders make is in the very first requirement. That is, that the stock have the proper pattern before the pullback. For example, being in a strong uptrend the way Pristine defines it before the pullback for a buy, or in a strong downtrend the way Pristine defines it before the retracement for a sell. This is one of the important points to a good setup.
This leads to a common question by the student. “Why did that pattern fail”? Now, patterns do fail, and that is why we have stops. However, it is so very important to understand which patterns are good plays that fail (some do), and which are low-odds plays that you should expect to fail. Do you know the difference? This leads to a concept that all must understand. There is a difference between ‘memorizing’ some pages in a book, and truly embracing a concept and ‘making it your own’.
One of the keys to applying any newly learned concept is follow-up. Most new students do no follow-up at all. Those that do, face a glaring issue. How do you follow up on yourself? Having someone skilled in the concepts helping you to understand if you are properly executing the strategies is essential to your continued development.
We follow-up by providing the opportunity for our graduates of Trading the Pristine Method Deluxe to be part of the Pristine Live-Online Graduate Training and Dynamics Lab. In there, graduates can review the seminar with a master trader and be able to ask all the questions they like. They are taught additional topics that used to be part of an intense trading lab that cost several thousand dollars on its own. They also receive the seminar via home study course, and can retake the online version. We do everything possible to make sure traders are making money from the methods we teach. There is also a WHOLE lot more; you can view the details at our trading packages page.
Invest in yourself. In a lifetime of trading, the price of a seminar is nothing. Invest in yourself. In a lifetime of trading, the time needed to properly put a seminar to use is nothing. Trading the Pristine Method may be all you need, but the education does not stop after the weekend you take the course.
Vice President of Services
Pristine Capital Holdings, Inc.