Another Tidbit for the File

Yesterday at 1:12 I posted an Update on USO you can read it by clicking the link, but the gist was this, we had a triangle and the point I was trying to make is this is exactly what most traders look for and based on what they've been taught through nearly a century of books specifically covering this price pattern, they have an expectation. Here's the chart and part of what I wrote...

"This is typically considered a continuation pattern so the expectation is for a breakout to the upside, again, it's an obvious pattern on the chart which gives Wall Street an incentive to fool around with it being they know everyone in the trade is watching it and being that the pattern is expected to breakout to the upside. So watch for a false breakout, I'd guess if it occurred below the triangle that would be good news, above the triangle, bad news, unless they don't manipulate it at all."


Here's an update of that chart...

The first triangle did what I mentioned it might, it broke down-that's the opposite of what traders have been taught so it would have taken some short term traders out, then it ran a bit higher and formed a bigger triangle. Being that it is considered a continuation pattern and the preceding trend was up, again the conventional wisdom says that it should break out to the upside. However, the conventional wisdom is exactly what Wall Street uses to take advantage of traders, take their shares on the cheap and trigger stops and other orders, all of which they make money on through the spread between the bid and the ask. So this bigger triangle that we closed on yesterday did the exact same thing again, this time it probably hit longer term traders as it gapped down this a.m. and then went on to do what it is expected to do, it moved higher. 


This is an example of why technical analysis, at least conventional technical analysis can actually do more harm then good. People read all these trading books that teach them, "this is what is supposed to happen" and they place their orders and on a day like today with the gap down, the longs expecting an upside breakout got thrown out of their trades, Wall Street picked up shares cheap, the market makers made their money and the trade went higher. I know we've all been there before, it's frustrating to be stopped out of a position to only see it go the way you thought it should. These are the games Wall Street plays, especially when it is a very obvious pattern like a triangle that every technical trader sees. 


What can you do about it? First of all, understand this is the way Wall Street operates. Like I warned yesterday, 


"This is typically considered a continuation pattern so the expectation is for a breakout to the upside, again, it's an obvious pattern on the chart which gives Wall Street an incentive to fool around with it being they know everyone in the trade is watching it and being that the pattern is expected to breakout to the upside. So watch for a false breakout, I'd guess if it occurred below the triangle that would be good news, above the triangle, bad news, unless they don't manipulate it at all."


So you can 1) use your risk management and give the trade a wide stop, this means to maintain your 1-2% risk per position or however you determine your position risk,  you take on less shares. when the trade moves in your favor, you can raise and tighten the stop and add to the position.


The second thing you can do is wait... Waiting is the ONE advantage you have over Wall Street, you can choose to not trade. So you wait for the trade to do what it is supposed to do and that is breakout to the upside. You place a limit order just above the breakout level and you take the trade only after it shows you that it will do what you expect-unless you have other confirming information, last Wednesday we bought the lows of the USO/oil sell off because of a strong positive divergence in 3C. 


By waiting you will lose a small percentage of the trade, but you have a higher probability trade with less risk.


It wasn't that long ago that these patterns were successful on a pretty regular basis, but just like overwhelming sentiment that Wall Street takes the other side of, Technical Analysis has become very popular and Wall Street know what every technical trader is looking at. You have to think outside of the box. If you are a technical trader, put down the books, look at these charts and figure out strategies that will allow you to profit from the behavior that you know Wall Street will engage in.


A third and final way you can deal with it is to buy the suspected false breakout as it just turns up in a reversal. This allows you to buy it cheap like Wall Street is doing. You put your stop just below the low of the false breakout (remember you are entering the trade only after the false breakout begins to reverse and usually that will still be less expensive then the breakout point or even the point inside the triangle.


So keep this in mind-it happened twice in a day.