Dow Jones – Pattern Setup

The Dow has been drifting sideways this month, unlike the Aussie 200 which is in full flight.

I came across this US 30 CFD setup with the aid of the Pattern Recognition scanning tool in our Tracker platform. It looks like a situation short term traders might want to keep an eye on.

 4 Hour Chart Setup

The sideways drift in the US 30 CFD has formed a triangle or wedge style formation. This follows the sort of strong trend that often produces the best results for pattern traders.

The pattern below is defined by our pattern recognition software. The shaded area underneath the pattern indicates a possible target zone if price breaks the support.

US 30 CFD 4 Hour - Source: CMC Tracker

US 30 CFD 4 Hour – Source: CMC Tracker

Searching for Patterns

Tracker has the facility to search for chart patterns either from an individual chart or by scanning large numbers of charts with a purpose built tool shown below. In this case I scanned for index patterns on daily and 4 hour charts.

CMC Tracker Pattern Recognition Tool

CMC Tracker Pattern Recognition Tool

This tool provides a lot of information including pattern ratings and performance history. You can view a short video on how to use it via the education tab on the Tracker’s lower tool bar.

US30 Strategy

Most pattern trading is based on the assumption that break outs have a reasonable chance of indicating establishment of a new trend.

The strategy outlined on the chart below is one approach to this US 30 pattern. It uses moving averages to help identify profit objectives and stop loss levels.

US 30 CFD - 4 Hour

US 30 CFD – 4 Hour

 

  • Entry. With chart patterns,  it’s very common for price to occasionally spike a little way through the intitial trend line. This happened with the lower trend line here. This situation leaves a trader with a choice between either using the initial line or being more conservative and putting a new line across the lowest point. Where a line has a lot of touches and only one blemish, you might feel more comfortable using the higher line. Here, I’ve been conservative and put a lower line on the chart. A typical approach would be to place a stop entry sell order below this line to catch a break out of the pattern.
  • Target. The 200 period moving average can do a good job as a support level in well established uptrends. In this case, it also falls within the shaded target area. On that basis, this strategy sets a profit objective at the 200 sma.
  • Stop Loss. As it drifts sideways within the triangle pattern, this chart has done a lot of work around the 50 period sma. This gives this moving average a good chance of becoming a resistance level if there is a re-test rally after the initial break. The stop is set just behind that the 50 sma

Order Ticket

Because the strategy uses a sloping trend line and moving avegages, some traders may tweak the order levels as time progresses. However, as things currently stand, orders based on the approach outlined above might be around the levels shown on this Tracker order ticket.

US 30 Order

Boundaries can be a sensible precaution with stop entry orders. These instruct cancellation of the order if price gaps too far below the stop level. Tracker allows you to set your own boundary limit. The order ticket shown below uses a 5pt boundary. This means the origninal stop entry order at 13920 is only filled at a price of 13915 or higher.

US 30 Order Ticket

Candlestick Patterns for early entry

When a patten has a well established resistance, some traders will add an early entry alternative to their strategy.

Here a typical approach might be to sell if price rises to but falls away from the resistance. The trader is using this failure to sell early, not waiting for price to break below the support line. However, a relatively close stop loss level above the resistance line can be used to protect against a break to the upside.

When candlestick patterns happen at a resistance line, they can add its significance. Trackers candlestick pattern search tool is handy for this purpose.

About Ric Spooner

Over 30 years market experience - professional trader, broker, director
This entry was posted in Market, Shares, Stocks, Trading and tagged , , , , , , , . Bookmark the permalink.

1 Response to Dow Jones – Pattern Setup

  1. nice work Ric. really good to show clients how to use boundaries to protect their entry points.

    Peter Cruddas.
    Chairman CMC Markets.

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