The TradersWire Guide To Finding Big Setups In Short Time Frames
Cup and Handles, the easy-to-recognize
Head and Shoulders, and Triple Tops and Bottoms: Intermediate-term and position traders are all-too-familiar
with these formations and have utilized them in trading and the
study of technical analysis for the last 30 years. While the patterns
themselves are still valid to recognize, for whatever reason these constructs,
which usually trace out over a period of many weeks or months, can also take
only a fraction of that time to play out. However, these “mini” or
“micro” versions are excellent signals for the short-term and swing
trader to key off when stalking for setups, and can often be precursors to
profitable moves.
The best thing about these “little” versions of these well-known
patterns is that they occur in all time frames, and can be exploited by all
traders, whether they be a strict daytrader, swing trader or position player.
The Mini Cup and Handle
One of the most popular patterns to intermediate-term traders is the Cup-and-Handle or Saucer-with-Handle pattern. Popularized by William O’Neil in his
groundbreaking book How To Make Money In Stocks, this formation is
usually recognized by weekend chartists who flip through numerous charts looking
for stocks who have sold off, bottomed and complete the base by rising to
complete the cup section over a three- to six-month period before building a
slightly downward wedging handle over the next two to four weeks. Compress this
time for the mini version into as little as 10 days to two weeks, and you have
similar potential for a profitable move over the next few days. When you can
spot them in conjunction with prior price behavior around a moving average, for
example, the likelihood of follow through is increased.
American Standard
(
ASD |
Quote |
Chart |
News |
PowerRating) has exhibited a tendency to
head for higher ground at or around the 20-day MA. When a mini Cup and Handle
takes shape at the end of February, a five-day, 4-point run allows the swing
trader to capture the majority of the move.
The inverse of the mini Cup and Handle works equally well to the
downside:
AG Edwards
(
AGE |
Quote |
Chart |
News |
PowerRating) appears to find support time after
time just below the 45 area, but the mini inverted Cup and Handle is a signal to
look out below. After a break of the handle and a one-day fake-out (A)
AGE drops 22% over the next month.
Head and Shoulders
The Head-and-Shoulders pattern is normally looked at by the
majority of technical analysts as a bigger-picture top of a bottom formation whose
signal is triggered when the neckline of the pattern is broken. As with all
chart patterns, the Head and Shoulders does have some room for interpretation,
but is characterized by the highest point of the pattern being between two lower
highs which draw the shoulders. Like the mini Cup and Handle, this micro version
can also play out over a few days, as opposed to weeks. It is normal for the
stock to make one probe back to the level of the neckline after violating it, so
that often becomes a higher percentage play for the swing or position trader if
it takes place,
while the day or swing trader can be a little more aggressive and play the original
breakout and the second move if they get entry points and pattern setups.
Andrx Group
(
ADRX |
Quote |
Chart |
News |
PowerRating) violates the neckline of the mini
Head and Shoulders in mid-February and after chopping around, returns as
expected to touch the point of the breakdown. The stock then proceedes to shed 20
points, or 33% of its valuation in the next nine trading days.
Helmerich and Payne
(
HP |
Quote |
Chart |
News |
PowerRating) forms a micro inverted Head
and Shoulders over an 11-day period in a strong uptrend. When the right shoulder
and neckline is broken, the stock goes on a multi-day surge to new highs, a
quick hit-and-run grabs most of an 8-point move.
Triple Bottoms and Tops
Triple Bottoms and Tops are employed by the majority of
technical analysts to spot bigger-picture reversals or the end of the recent
trend. In the mini version, these patterns are often forerunners of short-term
future price action. You don’t see many quadruple tops in the bigger picture,
and in the compressed time frame, this often is true as well.
Amerada Hess
(
AHC |
Quote |
Chart |
News |
PowerRating) pulls back and consolidates into a
trading range, forming a mini Triple Top just below the highest swing high.
After a short pullback and a reversal through the Triple Top, yields a 5 point
play.
Ballard Power
(
BLDP |
Quote |
Chart |
News |
PowerRating) appears to be hanging on for
dear life when the third low slightly undercuts the other two in the formation.
The following day the plug is pulled and BLDP loses 20 points in a three-week
period.
In conclusion, while harder to spot than their larger
counterparts, diligent study of the charts will help make these diminutive forms
much easier to weed out. Just as the grand versions foreshadow large moves over
time, for the short-term trader the “micro” patterns are often great for forecasting a change in direction, continuation or failure of a prior
move for at least the near term. This is what make these tiny mites pack a
powerful punch
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