TechniTrader Indicator Education "Contrarian Patterns Warn a Top is Coming" by Martha Stokes CMT

Using Leading Stock Indicators for Beginners


Often for beginners the Stock Market reversing and heading down into a correction is a complete surprise or shock. They are not expecting the turn, nor are they prepared for it. Fortunately for Retail Traders there are plenty of indicators that can warn of a top before it actually occurs. These can be Contrarian Patterns.

A Contrarian Pattern is simply something that is moving in opposition to price. In other words, using Leading Stock Indicators that expose selling while price is still moving up. This is one of the key elements to avoiding getting into a stock and then having it reverse on you, and sell down as you take a loss.

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In the candlestick chart example below the Leading Indicator called Balance Of Power in the bottom chart window, exposes whether giant to large lot institutions are buying or selling. It is showing red bars, which means the giant Institutions are selling or rotating out of this stock however price still climbs upward. These contrarian patterns warn a Top is coming.
candlestick chart example with a contrarian pattern showing a warn a top is coming - technitrader

Many Retail Traders wonder how this can be. If giant Institutions are selling or rotating quietly out of a stock, how can price continue upward?

What drives price upward is demand AND types of orders. If smaller lots are buying “At Market” which is the most common way for new Independent Investors to buy a stock, then price will continue higher so long as the giant Institutions are careful about not selling too many shares all at once. In this instance the red bars in the Leading Indicator Balance of Power warns this is a period of Quiet Rotation, and that the stock is at risk of a Topping Formation.

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There are a couple of days of green Balance of Power Indicator bars but that is far fewer than the red, and at the wrong price level for giant Institutions to be buying. They prefer to buy in at a bottom using Dark Pools, so this is speculative Smaller Funds buying at the wrong time. Then a huge amount of High Frequency Trader Firms sell off starts, those with smaller lots panic and Small Funds sell causing Balance of Power to have long red bars.

Summary

Contrarian Patterns in Leading Indicators help to see what is going on. Remember there are 9 Market Participant Groups and each has their own agenda, way of buying or selling, order type, capital base, and experience. The more you understand how each group trades, the better you will become with your personal trading.

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Trade Wisely,

Martha Stokes CMT
TechniTrader technical analysis using TC2000 charts, courtesy of Worden Bros.

Chartered Market Technician
Instructor & Developer of TechniTrader Stock and Option Courses
TechniTrader DVDS with every course.

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