How to Identify Downside Breakouts Prior to a Top - Candlestick Patterns Explained by TechniTrader®

Recognize Shift of Sentiment™ Patterns in Indicators

One of the more frustrating patterns for many Technical Traders and Retail Traders are the Flat Top Candlestick Patterns that form today. These new Topping Formations surprise many traders and result in whipsaw trades and losses with breakouts to the downside. What appears to be a solid Consolidation, Platform, or other Sideways Candlestick Pattern that would continue to move price upward suddenly breaks to the downside with no obvious reason.

See chart example #1 below.

When a Technical Trader is able to read a sideways price action as easily as they read a run up or down, they are able to trade more stocks with higher profitability. In addition, their ability to enter the run sooner increases.

There are several clues at this stage of the stock chart development that indicate which direction price will break. First of all, the indecision candlesticks within the sideways action reveal a weakness for an upside breakout. This stock is barely containing the heavy selling pressure from Dark Pool Quiet Rotation™ by the giant Buy Side Institutions trading off the exchanges in Dark Pools.

This hidden selling pressure is seen in the shorter duration of runs, the weaker run gain potential, and the prevalence of longer wicks on candlesticks. The candlesticks are also not forming a tight sideways Consolidation with a consistent low basing pattern, which is indicative of an upside breakout. This Consolidation low range wavers up and down, a common sign of selling pressure.

The black stock Volume spike by High Frequency Traders (HFTs) is often an exhaustion pattern, and the stock Volume bars that follow are declining steadily, which is easily seen using an Exponential Moving Average (EMA). Compare that to the prior red stock Volume spike, where stock Volume maintained its average and price moved up.

Confirmation of this analysis is with the Accumulation/Distribution indicator showing a selling pressure within quantities to the downside and a steady decline on Flow of Funds out of the stock as it moves sideways.

All candlesticks and indicators confirm that this stock is under heavy Dark Pool Quiet Rotation that is hidden within price which is moving sideways.

Chart example #2 is the same stock, and it shows what happened in the following months.

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Trade Wisely,

Martha Stokes CMT

TechniTrader technical analysis using StockCharts charts, courtesy of StockCharts.com

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