Technical Analysis for Today’s Automated Market

by Martha Stokes CMT © copyright 2014 all rights reserved.

Technical Analysis is not static but continually evolves and changes on tandem with changes to the market structure, especially from the institutional trading venues, platforms, and order flow.

In recent years, there have been many new technical patterns that have become more prominent that are brand new and are not in the older technical analysis books and articles. These new technical patterns are becoming more and more prominent. Technical Analysts need to recognize these new patterns, rather than dismissing them or overlooking them completely.

In particular the sideways price action has undergone the most dramatic changes for technical analysts.
This is due to how the giant lot investors currently buy and sell their huge lots, which are 100,000 – 500,000 share lot sizes. Since the giant and large mutual and pension funds dominate the Buy Side of the market controlling trillions of dollars worldwide, their price action is critical to identifying early on in a stock chart.

Sideways action is generally dismissed in older technical books as “non-trending” price action, however in the automated global marketplace the Dark Pools are buying in a controlled environment. Their buying is precisely calculated and controlled with bracketed order entry systems, causing patterns to emerge on the charts that reveal their “footprint.”

NVDA shows such a footprint with candlestick charting. It is easy to see the sideways pattern is very precise with consistent highs and lows, which is the most common footprint that Dark Pools leave on stock charts. These patterns are so consistent that they show up on daily, weekly, and monthly line charts.

Usually patterns alter from a daily to a weekly chart, and from a weekly to a monthly chart due to variables of trendline pattern variations from one time frame to the next. The Platform sideways candlestick pattern however, is persistent and recognizable on all 3 time frames. Please see the chart examples below of NVDA.

NVDA Daily view:

NVDA Daily view

 

NVDA Weekly view:

NVDA Weekly view

 

NVDA Monthly view:

NVDA Monthly view

 

By contrast, a Trading Range Sideways Price action alters significantly on the three time frames, showing the considerable inconsistency of buyers and sellers during a Trading Range Sideways Price Action.

GS is a true Trading Range Sideways Price Action. It is difficult to recognize on the daily chart using the same 9 month scale as was used on NVDA. See chart examples below.

GS Daily View:

GS Daily View

 

GS weekly chart shows that this is actually a trading range at risk of becoming a rounding top as the trading range is breaking down and forming lower highs and lower lows seen on a weekly but not as much on the daily chart.

GS Monthly view:

GS Monthly view

 

The weekly and the monthly charts of GS reveal how much the price action alters between time frames, whereas the NVDA chart is precisely consistent.

Summary

Technical Patterns are undergoing dramatic changes due to the massive internal structural changes to the global marketplace. As new types of venues, new types of professional and institutional orders are developed, and as the shift of power between small lot and large lot continues to evolve, technical patterns will also continue to alter. Some technical patterns may disappear altogether, other brand new patterns are emerging and becoming more and more common.

Technical Analysts need to continually learn the new patterns, understand how older patterns are being modified or altered as market structure adapts, and recognize how each affects price action on all three time frames.

Martha Stokes CMT and TechniTrader CEO is the Senior Technical Analyst and co-instructor for TechniTrader, the educational division of Decisions Unlimited. Stokes’ courses teach swing, position, options, intermediate, and long term trading and investing. In her 25 years of teaching and trading, Stokes has developed all of the material featured in this series and writes for various paper and internet publications. She also authors daily and weekly newsletters for all of her students on market condition and in-depth analysis of stocks, trading techniques, and strategies. For more information on TechniTrader courses, go to www.TechniTrader.com or call 888-846-5577.

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