Since our March lows, many technical traders have been scratching their heads over the moves, becoming increasingly frustrated that the traditional playbook isn’t working.

What most haven’t realized of course is that every so often, we enter a new realm where emotions run at extremes and conventional wisdom becomes chaotic disarray. Capital preservation anxiety from retail investors takes a back seat to performance anxiety from investment managers.

So in light of this clear transition, I thought it worthwhile to share with you the playbook from which we should now all be playing, reviewing many of the technical patterns you’re used to, with their revised definition for today’s market. Enjoy and trade them well.  (Scroll down just a bit).




Example: Semiconductors (SMH) October 2009

Traditional Name: Bearish Wedge
Traditional Setup: The bearish wedge signifies a change in trend and a consolidation before following through to the downside.
Action Steps: Anticipatory shorts may enter, looking for a break below the low of the biggest bar. Reactionary shorts may enter on the break itself.

Current Name: Bullish Cliff
Current Setup: The Bullish Cliff is a shakeout of weak longs before reversing higher, thus ripping the heads off bears and breaking to new highs.
Action Steps: Buy the dip aggressively. The steeper and sharper the decline, one may correlate with a larger position.


Example: S&P 500 (SPY) October, 2009

Traditional Name: Head and Shoulders
Traditional Setup: The Head and Shoulders is a traditional topping pattern and start of new trend lower.
Action Steps: Reactionary shorts may enter on a break of the neckline, placing a stop over the right shoulder.

Current Name: Mountain of Hope
Current Setup: The Mountain of Hope is a shakeout of weak longs before reversing higher, thus ripping the heads off bears and breaking to new highs.
Action Steps: Once the right shoulder is complete, traders may buy the next leg lower aggressively, adding as the pattern reverses higher above the right shoulder and head.


Example: Russell 2000 (IWM) July, 2009

Traditional Name: Inverse Cup and Handle
Traditional Setup: The Inverse Cup and Handle is a confirmational pattern, thrusting a stock toward new lows.
Action Steps: Reactionary shorts should enter on a break below the handle pivot, placing a stop at the last lower high.

Current Name: Bullish Tree Frog
Current Setup: The Bullish Tree Frog is a shakeout of weak longs before reversing higher, thus ripping the heads off bears and breaking to new highs.
Action Steps: Once traders see a Bullish Tree Frog developing, they shouldn’t hesitate in adding longs. Should the pattern break below the low pivot even momentarily, rather than taking a stop, it’s an opportunity to add more to their position.


Example: Intel (INTC) October, 2009

Traditional Name: Multi-Day Reversal (MDR)
Traditional Setup: The MDR is an exhaustion pattern after a significant thrust lower where a short may reset his position seeking follow-through to the downside.
Action Steps: Reactionary shorts should enter position on a break back below a previous day low, setting a stop at a previous day high.

Current Name: Candles of Glory
Current Setup: Candles of Glory is merely a shakeout of weak longs before reversing higher, thus ripping the heads off bears and breaking to new highs.
Action Steps: Buy the dip aggressively and repeat accordingly.

Yes, I know, while written in humor, the sad truth is that this playbook has worked and while I don’t expect it to be written in stone, it’s a friendly reminder that nothing ever is easy. Hang in there, we’ll get through this.