Updated: Apr 29
Thanks for taking the time to read today's blog post in this series of posts we will identify timely patterns in the market in our Technical Analysis 101 section of the market. These are great patterns to identify and to add to your trading arsenal! Please be sure to read the disclaimer on our site before moving forward, comment below and follow us on social media (Instagram, and twitter)!
Why do we look for patterns in the market?
Patterns are inherent everywhere in nature and life as we discussed in our first blog post. Human behavior in markets is no different - the buying and selling of anything that has a price (equities, bonds, commodities, cryptocurrency) that is bought, sold and plotted on a chart that will show us the patterns we utilize to make the best decisions in the market.
In addition, they provide us the opportunity to not only make better decisions, but also the opportunity to make quicker profits, enter a trade correctly while earning returns (30%, 50% and even +100%) in excess of what they would be if we simply held our cash in a bank account.
No matter the timeframe - minute by minute, hourly, daily, weekly, monthly, etc. the market creates these patterns over and over again. Why? Human nature. Therefore, we can use these patterns to profit in the market and even foresee potential patterns develop before they ever happen.
Today, we look at one of my favorite patterns. The W breakout, it's by far one of the most powerful chart patterns that I use to make money in the markets. We'll take a look at a couple of charts where we utilized this pattern to profit in the marketplace.
In the Cryptocurrency space we had a really beautiful W breakout pattern setup in Ethereum ($ETH/USD, Figure 1.1), the first green line with the two blue arrows indicates the 'double bottom' that sets up the W breakout. You can see how the W forms as we bounce from the $80 in Ethereum, rise to $364 (the horizontal blue line on the chart) and then retest that level of $80 and hold. When this happens it indicates there is a lot of demand for that instrument that we are looking at, be it Cryptocurrency, stocks, commodities, etc. They will all form this similar setup in this pattern showing support where previously held, bounce and then retest that area again.
After we have completed the successful retest and bounce either two things will happen: we break above the $364 level in Ethereum to never retest that level again (the horizontal blue level) or, like in this case, retest the horizontal support and make break for all time highs. As of today, 01/19/2020, $Ethereum hit all time highs! You can see, it's a simple easy pattern to spot and powerful too!
Why is this pattern so powerful?
Simple: Easy to spot, the velocity of the pattern on the breakout, your price target, risk/reward and easy to know if it failed the breakout.
We can see the same pattern from Ethereum in the below chart of $SDGR that we posted on our Social Media account, @essex_trading. After this tweet $SDGR subsequently went on a significant run almost back to $100.
Today, we can see the updated pattern of $SDGR on the daily (Figure 1.3) and weekly (Figure 1.4) time frames. The pattern after we tweeted it played out to a tee! We got the throwback, when the stock pulls back to the level of breakout above $62.55, the middle yellow horizontal line on the daily chart, and then proceeds to go on an epic run! Notice also, the 20 SMA, blue line on the daily chart, that defines the primary trend up-thrust never broke to the downside confirming the primary trend. Now we want to be taking profits as the RSI, MACD and Williams %R are showing negative divergences.
I wanted to include the weekly chart as well to show how powerful this pattern is. There have been only two weeks since the breakout out of that pattern where the stock pulled back. There are several ways to play this pattern to maximize your profits. We'll take a look at that in an advanced blog post, as well as the other pattern it is creating in the future.
After all was said and done we came away with a beautiful trade in $SDGR with a return of over +30% already and even higher returns in options. We see more developing in this chart and will follow up with another post of how to trade this pattern in the future to maximize your profits.
Essex Trading Quote of the Day (#EsxQotD)
“I love it when a plan comes together."
~ The A Team