Confirming Close Pattern Identification

10 февр. 2017 г.

This is a dynamic pattern which plays out differently every time but has clear rules to identify. It is helpful in gauging strength of new breakout beyond identified support/resistance (indicator line, prior swing high/low etc.), and weakness. Specifically, failure on the part of closing price to confirm any intraday penetration is significant, indicating a false, or failed, penetration, i.e. that the move in question is weaker than it might appear visually on the chart. Similarly, if such penetration does occur, it confirms the move indicating further price action in that direction.

I have used this when looking at charts for so long I do it sub-consciously at this point. This is not so much a trading as an analysis idea, although it is possible to program it into a system. The idea is illustrated on this chart to show how two successive penetrations of Ichimoku Cloud Support (1,2) and Resistance (3,4) were not confirmed on the close and successive closes. This way of looking applies to any such level, be it an indicator like the Clouds here, or any identified price level (such as previous highs or lows establishing support and resistance). OK, let's look at this (Note it's a weekly chart, which means the info is more significant; but same rules apply in day-trading charts, albeit significance is lessened somewhat.)

1. Price goes decidedly through lower flat-lined Cloud support (flat lines are more significant S/R).
However, the close of the bar rallies to the flat line area = NO PENETRATION of cloud = NO confirmation of bearish move to date (going through cloud bottom is a classic Ichimoku Cloud Short Signal).
2. In subsequent bars, if you look carefully, you can see that similarly even though some bars intra-week (intrabar) do penetrate prior intrabar levels, on a closing basis they fail to make new highs or lows. Let's go back to 1. In order to Confirm the new low made by Bar 1, the price would have to close not below the flat Cloud Line anymore, but below the low made intrabar during Bar 1. Indeed, for 5 bars in a row, although price was below the Cloud Lower Line, the new Bar 1 low was not penetrated, either intrabar or on a closing basis. Meaning the seeming short/bearish situation was weak and thus a rally up was likely.

3. Rally up duly ensues. Goes through cloud quickly. Indeed, the first big bar up (2 bars before #3) pretty much gets to the upper cloud (flat)line and then the market tracks the rising cloud line until penetrating on Bar 3. Then the 2 bars after Bar 3 each make higher highs but on the close they fail to penetrate the previous new high. This is an Unconfirmed Higher High or Unconfirmed Long Signal. Indicating that the market will probably sell off soon, which it did.

Note also that the Bar before Bar 3 did make a Confirmed higher high, indicating further price action to the upside, and indeed a nice little swing occurred. Bar 3 did indeed penetrate the upper cloud line on closing basis indicating further follow-through, but after Bar 3 no new confirmed higher highs took place, indicating weakness.

Note also that the bar after Bar 4, although the continuation level downwards is slight, the close is decidedly below the Bar 4 (bearish Band signal on this chart), indicating further downside potential of this move, which, after 2-bar pullback, duly ensued.

If you look back around late Febrary 2015, you can see that all the way through May 18 the market failed to make a new confirmed high, so although some intrabar highs were made - many - no significant bullish continuation took place. And the May 18 new high was only by 2 pts and was never taken out, even intrabar, indicating how it was just a bull trap bar after all. And then after that were another series of bars failing to make new highs - clearly setting up for more bearish action to come - until market sold off big-time 08.17 going not only through the lower Band line support, but almost through the bottom of the long-term bearish clo