Contrarian Patterns For Beginners

Indicators Warn Top Coming As Price Moves Up

Often for beginners, the 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 indicator “Contrarian Patterns.”

A Contrarian Pattern is simply something that is moving in opposition to price. In other words, the indicator is exposing 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.

As an example in the chart below the stock indicator Balance of Power BOP in the bottom chart window exposes whether large lot institutions are buying or selling. It is showing red which means the giant funds are selling or rotating out of this stock, but price is still climbing upward.

TechniTrader 022615 Weekly chart 1

 

Many retail traders wonder how this can be. If giant funds 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 a new investor to buy a stock, then price will continue higher so long as the large lots are careful about not selling too many shares all at once. In this instance the red BOP warns that this is a period of rotation, and that the stock is at risk of a topping formation. There are a couple of days of green BOP but that is far fewer and at the wrong price level for giant funds. They prefer to buy in at a bottom, so this is speculative smaller funds buying at the wrong time. Then a huge high Frequency Trader HFT sell off starts, smaller lots panic, and small funds sell causing BOP to have long red bars.

Summary

Contrarian Patterns in stock indicators help you see what is going on. Remember there are 9 Market Participants 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 be at trading.

 I invite you to visit my website at www.technitrader.com

Trade Wisely,

Martha Stokes CMT

Chartered Market Technician
Instructor & Developer of TechniTrader Stock & Option Courses

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