CHART CHAT
Steppin’ Up
In Chapter 2 of our publication When to Buy and When to Sell; Combining Easy Indicators, Charts, and Financial Astrology (available on Amazon), we introduced some basic chart patterns and how to interpret them. In this edition of Chart Chat, we will discuss a trend formation sometimes referred to as “Stair-Step,” (also referred to as the Step-Ladder).”
Utilizing Moving Averages, trend lines, and indicators, as well as understanding price action, cycles, and money flow are all valid sources to implement into any strategy. Adding another layer to your research, however, that reveals the underlying conditions of the overall market, or industry, can make a huge difference prior to the analyzation of a specific stock chart. If you are not an experienced day-trader or investor, it is very easy to get caught up in the news, and short-term price action, that may not necessarily reflect the true trend or direction.
At times, when visually analyzing a chart, it is not very difficult to determine the trend for the desired time frame, on the surface, and the Stair-Step pattern is one of the easiest to recognize. Long-term investors often remain in investments, or extended trades, so long as the trend remains intact. Shorter-term traders, however, usually choose to take advantage of various stages throughout the trend.
The Step-Ladder pattern provides several such opportunities as it ascends, or descends, based on the direction of the price action. The typical Stair-Step pattern closely resembles a stairwell, as it is constructed of a series of higher-highs on the way up, and lower-lows on the way down, with flat (consolidation) periods in between (see Figure 1a).
FIGURE 1a
Additionally, the consolidation (or indecision) period during this pattern tends to be very close to equal lengths between their trending periods, and connects those trending periods to form the price pattern (Figure 1b).
FIGURE 1b
Strong Step-Ladder trends can last weeks, months, and even years, and generally cross, or develop above (in an uptrend), or below (in a downtrend), the crucial 200-day moving average of an equity (please refer to Chapter 2 of our publication for Moving Average information). As we know, “the longer the trend, the stronger the trend,” and this pattern provides a more stress-free investment or trade, so long as it doesn’t break a support line. A long Stair-Step formation will generally trade above (or below) other important levels, including the 100-day and 50-day MA’s as well, providing further confirmation of the strength of the trend direction. Longer-term traders who choose to add to their positions, or dollar-cost average, will normally do so during the consolidation/flat period. For those who wish to take some profits, or set “mental” trailing stops, that period is also ideal as the “indecision” may lead to a reversal.
When this pattern develops, swing and day-traders often attempt to take advantage of the pause in the trend (consolidation), to take profits and move on to another trade, or potentially re-open the position once the trend confirms a continuation in the same direction.
To assist in recognizing key points in the pattern, active traders will insert other indicators including multi-time frame moving averages, support and resistance line overlays, and oscillators, many of which are discussed in our publication.
For those familiar with basic chart reading, the support and resistance lines in a clean Stair-Step pattern will form a diagonal channel in which the stock price will trade, with little deviation (Figure 2). This descending (or bearish) trend will continue until the upper resistance line is pierced. High volume on the continuations after consolidation assists in confirming the trend, which in turn gives confidence to trade to the downside.
FIGURE 2
There may also be slight pull-backs (bull-flags) along the way during the consolidation period, which is common (Figure 3). This allows for clear and concise decisions to be made when considering closing the position, or setting a stop loss to preserve capital. So long as the flag does not exceed the nearest support line, the trade is relatively safe in the trend direction unless support (indicated by red arrows) is broken.
FIGURE 3
The more experienced traders will add signifiers including shorter time frame moving averages, Volume Weighted Average Price (VWAP), Bollinger Bands, Fibonacci Retracements, and others, as they are searching for quick trade success.
For the beginner, or intermediate, it is best to start slow, with small share sizes, only a few basic indicators, and good risk management. Building your way to improved confidence, emotional control, and recognition, will result in a higher probability of success.
In future editions of Chart Chat, we will continue to provide various technical pattern education, analysis, and potential price movement set-ups.
For those interested in Astrological analysis, planet positioning and transits through the zodiac houses and signs have many similarities to technical analysis. The theme of cycles, repeating patterns, and historical data can be viewed the same way, as the probabilities can be calculated for previous percentages of success. The difference is the use of an Ephemeris, a basic calendar of future planetary transits and aspects (see Chapter 4 of our publication for details), which allows for future positions to be known, unlike the next line, bar, or candle on a technical chart. Although no source will be 100% accurate, this extra layer can be very useful. For those interested, please refer to Trader Transits and U.S. Stock Market blogs, updated regularly on this site.
***As always, this information is not intended to be financial advice, or any specific buy or sell recommendation, but rather a guide to assist the reader in some further understanding of current economic conditions/movements in the sky, and how they can affect moods, behaviors, world events, and financial markets.
