Price patterns use to form out of market sentiment, more and more they are being artificially manufactured as Wall St. knows exactly what technical traders are looking for, they give it to them and in the process set them up to hold the bag. You can see this everywhere, not just price patterns, but research notes, Cramer's call to buy FB (GS his former employer was one of the IPO underwriters), etc.
More and more the market is manipulated and understanding how and why can often give you that extra edge.
As most of you know, gold and silver are my two least favorite assets to analyze because of the extra-market manipulation of both; i.e. margin hikes and in silver in particular the JPM silver short inherited from Bear Stearns. If you want to see extra-market manipulation, just look at Spring of 2011 when JPM and Blythe Masters where trying to defend their short, silver broke above their defensive line and ran up quickly only to see 5 or 6 consecutive margin hikes from the COMEX (remember JPM did the F_E_D a favor by taking on Bear Stearns-I think it's highly probable those margin hikes-EVEN AS SLV WAS FALLING were a little quid-pro-quo).
It's interesting how many different asset classes have the same price pattern and 3C patterns. Here's a bear flag/pennant, just like we see in the market ad a number of industry groups and individual stocks. This is a historical bearish consolidation/continuation pattern. Technical traders expect this triangle to break to the downside and start a new leg down roughly the same size as the last leg down that led to the consolidation pattern. This is where Wall Street manipulated these pattern all of the time on every timeframe. Note volume is correct for the consolidation as well, it is diminishing in to the formation of the apex.
Here's the medium term larger picture or strategic view of SLV, a 60 min positive right in the pennant, traders would expect this pennant to be under distribution, the opposite is happening.
The 15 min chart has the same features many of the other risk assets have, that accumulation stage in early May, then a stronger positive divergence in to the consolidation pattern, this is leading at a new high, which if you think about it makes complete sense. We try to trade in the same manner as Wall Street, which means we often phase in to trades, the first positive divergence would see about a 1/3 normal position commitment, we leave room in our risk management to add at better prices. The much stronger positive divergence right now suggests Wall Street is doing the same as we do and at better prices is adding more shares, this is the same thing we do, often filling out the complete position where we think the reversal area is.
Now looking at the near term and remember we are inside the pennant consolidation on these charts, we see a positive divergence at the lows which are right at the support line of the pennant, of course Wall Street wants to buy as cheap as possible, that's why they use VWAPS to gauge a market maker/specialist's fill of their order. As prices move out of the accumulation zone (higher prices) you can see a small negative divergence knocking them back down, I would bet a dime to a dollar this is the market maker/specialists influencing the market to bring prices back down to the area which they want to accumulate in (lowest prices possible).
This 2 min chart shows a negative divergence as prices reach the upper support line of the pennant and knock them back down, once they are down, look what happens next-a strong positive divergence/accumulation which happens to be at the exact support trendline of the pennant pattern. Note the loss of upside momentum, but on a 2 min chart THERE IS NO NEGATIVE DIVERGENCE! The negative divergence on the 1 min chart is NOT strong, it is NOT distribution, just enough to turn prices back down. If the negative divergence on the 1 min chart was strong, it would appear on this 2 min chart-this is the manipulation of prices, allowing smart money to put on a position at the best prices while technical traders think the exact opposite is happening. The technical traders seeing this bearish pattern will sell short (early) in anticipation of the pattern breaking to the downside as nearly 100 years of Technical Analysis have taught them. This short selling (selling) provides the liquidity needed to accumulate shares without boosting volume on buying which would raise suspicions. Often we see a break below a pattern like this which for Technical traders, confirms what they have expected and they move in to the market short in bigger size, which gives smart money more shares they can accumulate on the cheap with the added bonus of a bear trap. As soon as prices cross above the triangle, shorts realize they have a failed pattern (at least in the near term) and they are forced to cover, all the early shorts who entered during the bearish pattern's formation and those that entered on a break below the pattern are all now at a loss and start covering, which changes the supply/demand equation sending prices higher, which causes the hold out shorts to cover, again sending prices higher. The head fake move is a primer that gets a bigger move under way.
One of my favorite examples of this was our GLD trade or the short positions accumulated in BIDU, both on head fake moves.
A quick look at GLD probably explains the concept better...
GLD had formed a large triangle after an extended rally of many years, but at least 3 years of clean rally. We suspected this was/is at least an intermediate top if not a primary top. Price moved right around the apex of the triangle, a solid break above would cast the bearish top pattern in doubt, but we new something few others did at this point in time, 3C was showing a large negative divergence/distribution. Since all of the concepts I explained above about head fake moves being a primer to get momentum behind a reversal, we saw a resistance area and thought "Before a downside reversal as 3C suggested, we will see a head fake move to the upside to trap longs). A day or so later the short term 3C charts confirmed small positive divergences suggesting this defined area of resistance would see a breakout. We waited for the head fake move to short GLD.
Here's the head fake move, a breakout above resistance and above the triangle's apex, note volume picked up as momentum traders chased the breakout (which is an old technical analysis concept-wait for confirmation in price). At this point we could see distribution in to the buying demand grow even deeper and I entered a GLD put as did many other members.
within a few days the bull trap was sprung and as GLD moved below former resistance (current support) longs started to panic and sell, which put more supply on the market than demand and pressured prices lower, then more longs sold at a deeper loss, you can see it in the day's candlestick and the volume-a perfect bull trap. The GLD puts were closed for a nearly +215% gain in just days with minimal risk.
Ultimately GLD moved much lower as 3C had told us before the head fake even began, but that initial reversal day provided the momentum for the reversal and the extra profits for smart money. I could have kept the puts longer, but as they say, "Bulls make money, bears make money, pig get slaughtered". The momentum of that day caused premiums to soar and that was the best single day to exit. After that there was some consolidation and between that and time decay, it just seemed best to take the gains on the original plan. What should be clear by these charts is the fact that we see these head fake moves on all timeframes, before all reversals probably 80% of the time, technical traders are just that predictable that it is virtually guaranteed money.
Back to SLV...
On a 5 min chart you can see the small distribution sending SLV lower and to the bottom support trendline where a powerful positive divergence formed-buying on the cheap. Note there's no negative divergence on this chart today, there was a smaller one sending prices a bit lower, but it wasn't serious, it's just the tactics of those who are filling the orders and making a market.
On a 15 min chart in the pennant, last Friday was the only serious negative divergence sending prices to the lower trendline and there we see a serious positive divergence. It's sort of the same way market makers work a VWAP.
Ultimately SLV looks like it will move higher, again to do so, dollar weakness will be needed. It's nearly impossible to predict the exact specifics of whether there will be a downside break below the consolidation before a reversal or if they are ready to break it out to the upside. More now than ever, fundamental news events/surprises are influencing the market and I suspect Smart money has to adjust to these events as they unfold; we knew that we'd be entering a more volatile, less predictable area a month ago, but like I say, "Don't get lost in the lines", keep an eye on the larger picture which is this chart...
The increasingly powerful 15 min positive divergence in SLV.
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