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Multiple Time Frame Analysis, the 3-Week Chart, and the Square of Nine Wheel

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Although the S&P 500 (INDEXSP:.INX) did turn up nicely from the first Plus One/Minus Two buy setup since the strong impulse move at the beginning of the year, with many individual stocks tacking on nice intraday gains, the broad market gave little new information. So, I want to look at charts of two former leaders to walk through the subtleties of trend change.

The first is former leader Under Armour (NYSE UA), which topped shortly after splitting 2-for-1 following a 100% advance in a year.

That is often a textbook calling card for profit taking.

Following a break/overbalance of its 50 dma in September, UA rallied to test the highs, carving out a potential right shoulder in the process.

A change in trend was in the cards when UA left a large range outside-down day (expansion Pivot sell signal) below its 50 dma again in October. The signal bar was followed by a breakaway gap which quickly led to a test of the 200 dma. The first test/undercut of the 200 dma led to a bearish backtest of the overhead 50 dma.

Notably, despite the market turning up from a mid-November low, UA continued to underperform, showing poor relative strength. Ultimately, there was an authoritative break of the 200 dma.

Note the recent Topping Tail at the 50 dma a few days ago which telegraphed lower prices. Despite yesterday’s turn up in the market, UA carved out a new closing low for the move.

Now what will be interesting to see is how UA responds on a test/undercut of the Bottoming Tail from December 17, especially as the Bottoming Tail in December occurred as the Head & Shoulders projection was satisfied.

That said, all trend analysis demands looking at multiple time frames. W.D. Gann said to key off the Weekly Swing Chart to determine the trend.

Checking the weeklies shows UA may have a larger H&S topping pattern on the clock.

The key takeaway from the weekly chart is the failed turn-up attempt on the week ending 10/19, leading to a weekly Hook, Line & Sinker sell signal on the week ending 10/26.

While there is always beaucoup noise and wiggles in any chart, the story of trend is always one of primary and secondary moves: it takes time for big picture trends to play out, but individual bars on the dailies and weeklies send telltale signals. The bottom line is that in downtrends, the behavior on turnups on the weeklies is typically bearish and defines highs and vice versa; in uptrends, turndowns in the weeklies define lows.

Such was the case on the weekly Topping Tail on UA which backtested a broken trendline on the week ending November 30. This also was a weekly Holy Grail sell signal with UA reversing after tagging its overhead 20 week moving average. (not shown).

Let’s take a look at Caterpillar (NYSE:CAT), a name we’ve often said was key to the action.

A weekly CAT shows the 3 Week Chart turned up in late 2010 and stayed up all the way to an early 2011 top.

The 3-week chart and the 3-day chart do a good job of identifying the trend. The trick to the trade is that in an uptrend, a turndown in the 3 week or 3-day Chart should define a pullback low relatively soon in terms of time and price.

Note the turndown in the 3-Week Chart in CAT on the week ending 5/27/11. CAT went lower and the next turn up of the 3-Week Chart, defined a significant high on the week ending July 8, 2011.

On the week ending 10/28/11, the 3-Week Chart turned back up with authority (it was not a nominal turn up but exhibited strong momentum). The first pullback/consolidation from such momentum typicall offers good entry. The 6-to-7 week textbook consolidation led to an breakout telegraphing a test of prior swing highs.

In fact, CAT went on to test the highs around 110, carving out a double top.

Turning to more recent action shows a Plus One/Minus Two weekly buy setup on the week ending  9/7/12.

Note that this buy setup led to a test of a downtrend line followed by a final test of a rising trendline connecting the 2011 low with the spring 2012 lows.

CAT was in a position to advance following a Rule of 4 buy signal on the weeklies -- i.e., a break over a 3-point declining trendline in December.

Notably, this was coincident with a turn up in the 3-week chart.

It is important to keep a simple method for trend determination; otherwise, as traders, we can easily become overwhelmed. If surprises happen in the direction of the trend, it is important when trading the dailies to drill down to the weeklies to determine the trend.

Note the huge upside explosion/surprise in CAT on January 2 occurred while the 3-week chart was UP and after the Rule of 4 buy signal.

Note the large-range outside-up day on the last session of 2012, which catapulted CAT over its September high.

The 3-month chart on CAT is now pointing up and the behavior from here will be key to observe.

Remember, trends turn on a dime, while most traders cannot as confirmation bias clouds an objective analysis.

Note that the explosive advance in CAT in September fizzled out following a new swing high above the August high. A decline now that stabs back below the September high could easily see CAT backtest its 200 dma, which would tie to Gapfill.

Putting the pieces together of my swing trading method and pivot point/signal bars (Form Reading) along with Square of 9 Wheel analysis, does a good job of identifying setups that put the trading winds at your back increasing the odds of a setup playing out successfully.

For Apple (AAPL), yesterday/today ties to 515 on the Square of 9 Wheel.

Click to enlarge

Since AAPL has a Charlie’s Angels buy pattern on the clock (3 Tails, Bottoming Tails in this case, in close proximity), the expectation is that the most recent pullback in AAPL may pull back the rubber band for a rally attempt. Note that the last turndown in AAPL occurred from a declining trendline, which coincided with the overhead 50 dma. If AAPL should turn up from here, a breakout over this trendline could quickly lead to a recapture of its 50 dma. This is pure conjecture at this point, but this is how one must anticipate the patterns in conjunction with square-outs. Alternatively, if AAPL stabs through the little ‘triple bottom’ it should flush out quickly.

Interestingly, note that since the breakaway gap below its 50 dma on October 8, AAPL had never been above its 50 dma. AAPL has now carved out a declining 3-point trendline following 3 Bottoming Tails.

Is it possible that capturing this declining trendline puts AAPL in a position to attack its 50 dma, which if successful, could see an ensuing drive to backtest the overhead 200 dma? In so doing, AAPL could carve out a big picture ‘W’ bottom.

if you are interested in seeing a recent webinar regarding the Square of 9 Wheel, click here. The Wheel is available to purchase and comes along with a private phone consultation on what I have discovered about it over the past 20 years. Email us at for more information.
POSITION:  No positions in stocks mentioned.