Trading Price Reversal Patterns
This is Paul Wett with www.WettTraderLLC.com I’m just gonna take about 4 – 6 minutes here folks and just show you some examples of Price Reversal Patterns. We just had a really nice price reversal pattern folks. We spot these out, we teach our students and our clients high probability, lower risk trades.
Reversal is probably one of the best trades. Reversal is when a market is trending down, you could clearly see, this is a 240 chart and this market is trending down from the 18, this is 18 moving averages, this is the 40 moving average straight here down. The 18 is lower than the 40. So we’re going down, down down, (this is S&P 500 E-mini Contract folks) all the way up here, (what is this) the begging of the year January, 2000 – 2050 area all the way down to 1810, 1806 okay folks. 1804.25. Now this comes down, down, down, down, down, where do we want to start taking a look at buying some of these stuff to see when these things gonna stop selling? See, I wanna sell, sell, 18 – 40 sell, 18 sell, 40 sell, 18 sell, 40 sell, 18 sell, 40 sell, BAM! Now I’m getting stopped at, BAM! Look what happens, the moving averages crosses 18 – 40. So now, this is telling me that now, my 240 which is a 4 hour bar, is trending up because my 18 crossed the 40. But what keeps it more even exciting folks is when we have a reversal like that, there are only two or three patterns that I know that you can see (or at least that I can see because I’m a very visual guy) reversals on the market.
All reversal is folks is when buyers and sellers, they ran out of gas, were selling. Definition of a trend, lower low, lower high, lower low, lower high, lower low, lower high, lower low, lower high, lower low, lower high, lower low, lower high. This high is lower than this but now we’re getting to, this is still lower high too. We’ve got 1904 – 1907 and now we come and make a low again.
Now, this is called a Head and Shoulder pattern. (I love the head and shoulder) This is a reversal. This is actually called the head and shoulder bottom. If you draw your lines here, let me see if I can draw to make it look clearer for you guys. I want you to really see this. This sometimes, this happens on all time frames, but this is my shoulder right here folks. My trends coming down, my trends coming up, and my trends coming down (this is my head). Then my trends coming up, and my trends coming down (this is my shoulder) and my trends coming up. Okay, this is the head, these are my shoulders. Now let me show you what I’ve got here too. This is called the “neckline”. Where my shoulders are, you can draw a horizontal line, across there and that’s gonna be some really good resistance. Really good resistance. After you make your shoulders, you make your lower low than this low. Now, we made a higher high than this low, so when I want to get on board and I want to try buying this market, this is gonna be a good opportunity. Now let me tell you folks, you might not win on every trade but that’s okay! On the average, you’d gonna be with the trend, and the trend is your friend. Because let me tell you something folks. This is exciting! This is real and this is right here, and this is right now.
The other thing about the head and shoulder reversal patterns is the markets’ gonna reverse. It’s gonna tell you, where it’s gonna go. And come on folks, this market is actually speaking to you, you just have to listen to the language, listen to what it’s saying. It’s telling you that I have resistance at this 1900 level. It’s pretty clear folks. We sold it here, came here, sold it, made a lower low. Sold it again, didn’t make a lower low. Sold it again, did make a lower low. What do you think is gonna happen folks? Everybody who’s selling, this is where their stop is. This is where they stop. So what that means in this head and shoulder is gonna give you an idea because this is a big downtrend.
Now folks, I’m not telling you that downtrend is over. What I’m telling you is it’s time for the market to take a breather and when it takes a breather it’s sometimes gets volatile, it cross trend trades on longer time periods, but with this knowledge, you can take advantage of it. You can take advantage of it by staying with this intermediate trend until it hits its objective. Let me tell you how that works. You can take this high (this head and shoulder) about 1903 here 1907 I mean, this low is 1804 folks, that’s a 103 points, 103 points. A 103 points is a $5000 trade in the S&P E-mini 500. I don’t know how long it’s gonna take, but usually it is a 4 hour chart. It’s probably be a week or two because it is spanning over you know, a week or two. So when this thing forms in a week or two, it’s gonna bust out, it’s gonna hit its objective probably within 5 – 6 days. We broke out of the triangle here (not the triangle, I apologize). Triangles, another reversal pattern. If you wanna see about triangles, see my “how to trade a triangle chart”, same concept, it’s a little different. This is the head and shoulder, if it breaks out the shoulder here, if it breaks out of this neckline here, it’s gonna go this distance which is 100 points. In my opinion, that means that we’re projecting this thing to go out about 2000 and that’s not unrealistic and this is the level of resistance in here. Now my goal is to tell you guys and use my software www.WettTraderLLC.com to take advantage of these trades! To take advantage of these trades!
Now what’s gonna happen here in this head and shoulder bottom. Usually there’s an 80 to 90% probability that we’re gonna hit that 2000 before we take this low out, that’s all that I’m gonna tell you, that’s a reversal. Now like what I’ve said, over the long term, I’m not saying that the trend is over because if you are looking at the daily chart you could clearly see that we’re in a big downtrend folks. But this is my head and shoulder bottom, now can you see that on the daily chart? I can see that on the daily chart because I see that we’re popping here. We haven’t held a close below this level that’s 1850 level, that’s very good for support and once we’ve passed here like what I’ve said this 1905, I think we’ve got 2000 so we might bang through here, one, two, this could be an A-B-C one, two, three, we have a four and what usually happens out of a reversal pattern is we either have a triangle on a wave four to retest this low or we break out the other way. So but right now I think that we have a high probability to meet the objective of the 2000 trade.
If you look at these chart folks, this is the weekly chart, look at that 18 moving average folks. It’s right under my objective of 2000. Isn’t that interesting? I’m just telling you folks, I want you to make money, www.WettTraderLLC.com we can make some money, I can show you how to take advantage of these trades. They happen all the time, they are high probability trades, low risk trades, I use a 6 point stop, $300. I can show you an area on these charts where the market’s gonna reverse with the very high probability. You’ll also see that same pattern, now this is a 5 minute chart folks, this is a 5 minute chart. This is some great trading here man, great trading, but this is a 5 minute chart. Now, you’ll see those reversal patterns or the head and shoulder reversal patterns on every time frame. The thing that you gonna have to watch folks is the size of the triangle, because this market can do whatever it wants, right now, right here. This is the 5 minute chart right? This kinda looks like a head and shoulder reversal pattern right? This is kinda look like, this is my shoulder here right? This is my head here, made a lower low, this is another shoulder here, significant low, all you need is a 5 bar low and a 5 bar low, and a lower low in the middle and you know that you’ve got the support and resistance there and as long as you’ve got the support and the resistance there and this is would be my neckline at the top, and so this head and shoulder bottom, look at this 1898 that’s about 99, that’s a 5 point triangle. We will way more 5 points, we went up, we went 10, came back up, look at this. This is another market pause and what is this? This is a triangle folks! Market is telling you something. The market is telling you something, get on this train!
If I make a higher high, this is the sellers saying that I’ve got this, I’ve got this, I’ve got this guys. This is what the sellers are saying! This is what the buyers are saying, I’ve got this. This is what the sellers are saying, I’ve got this. What the buyers are saying, not do I only got this, we’re gonna break through this and it broke through here. So this is a non reversal triangle, this is called the “continuation triangle”. But this is a pause in the market head and shoulder, it’s a pause but it’s a reversal, the head and shoulder is the bigger, longer term reversals. Sure, sometimes you’ve get a head and shoulder that will breakout and go the other way, usually that happens when you got news.
This is not a head and shoulder, this is not a head and shoulder. You see folks, this is not a head and shoulder. Some people think, I’ve had some students think that this is a head and shoulder. This is not a head and shoulder. We really have to bang on this line four times. We never did. It come up here once, then come down here, then come up here, then come down here, then come up here, then come down here, then come up here. So this would have been, you know, this is not a triangle. People think that sometimes that this is, but no. You’ve got to come right here. It’s got to be symmetrical and you have your objective.
So like I said, there’s a lot of opportunities at www.WettTraderLLC.com we can show you the reversal patterns, we could show you the continuation patterns, we could show you how you can take advantage of this software because that’s where the money is folks. Let the software do all the work, just click the button, turn it on. When you see the pattern, click the button, and turn it on. Any questions, www.WettTraderLLC.com, like me on Facebook. If you wanna learn how to trade the reversal patterns, head and shoulder patterns, call us! www.WettTraderLLC.com like us on facebook.
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