Saturday, August 9, 2003
Issue Contents:
| 14:43 | The EX/RC/EX Pattern This article documents a setup used by Carlos Plech. |
| 15:44 | Reading for Success: The Art of Contrary Thinking This is the second book on our Reading for Success list. |
| 16:20 | Reading for Success: Winning the Mental Game on Wall Street This is the first book on our Reading for Success list. |
by Carlos Plech
The Expansion/Running Consolidation/Expansion pattern was documented by Carlos Plech.
I’ve found this pattern to be quite reliable across multiple markets and time frames. The pattern begins with an expansion bar, a bar with a much larger price range than the ones preceding it.
Next, look for the market to begin consolidating in the same direction as the expansion bar. A shallow retracement of the expansion bar often occurs, but soon after, the market begins to consolidate and form small bars just above (if upside expansion bar) the expansion bar or just below (if downside expansion bar). This is what I call the running consolidation part of the pattern. This stage may take a few bars or may occur over a larger period of time. I have not observed a typical amount of time for this stage to last. The most important thing is to watch for the market to keep moving beyond the close of the expansion bar in the direction of the expansion. It cannot turn into a flag type consolidation, or the pattern will be invalidated.
After a certain amount of time of the market slowly moving in the direction of the expansion bar, the people on the wrong side of the market will bear the pain no longer and close their position. This in turn will lead to a climax move, or to the forming of another expansion bar which is almost always equal in size to the first expansion bar that set up the pattern. Watch for a very brief reversal fakeout just before the final expansion bar takes place.
In this example, we can measure the target for the pattern after an upside expansion. We add the length of the first expansion bar to the low of the running consolidation.
Note the length of the green line showing the size of the first expansion move. Then we see how the market briefly retraced some of the expansion move, and proceeded to consolidate in the same direction (up) of the expansion move.
And finally, note how the climax expansion move is equal in size (the same green line) to the first move up, as measured from the low point of the consolidation just previous to the final climax move.
EDITOR: Note that this example is actually a breakout after a test of top.
The running consolidation represents "lack of reversal" after the test of top, and should serve as ample warning for anyone who is short to get out.
Reading for Success: The Art of Contrary Thinking
The second book on our Reading for Success list is by Humphrey B. Neill. We consider this to be the definitive book on an overlooked subject that we call the "outer game of market psychology" -- how to divine the hearts and minds of the crowd.
"The art of contrary thinking consists in training your mind to ruminate in directions opposite to general public opinions; but weigh your conclusions in the light of current events and current manifestation of human behavior.
It may appear to some readers as though the theory of contrary opinion, or the art of contrary thinking, is a cynical one. I do not think it is at all. I believe it is merely a matter of getting into the habit of looking at both sides of all questions and then determining from your two-sided thinking which is the more likely to be the correct vision -- which in turn leads to the correct conclusion."
Written in 1954, The Art of Contrary Thinking contains timeless observations, and demonstrates why thinking is critical to maintaining objectivity so that we may see the world as it is. The book contains numerous examples on how to read public sentiment correctly, and how to see the other side of any issue. This is a key component to formulating scenarios. If you always happen to be on the wrong side of the trade, stop now, and read this book.
Other books by Humphrey B. Neill:
Reading for Success: Winning the Mental Game on Wall Street
The first book on our Reading for Success list is by John Magee. You will be surprised as we were to find that this book, originally published in 1958 as General Semantics of Wall Street, drawfs the admittedly huge contribution that he made as the co-author of Technical Analysis of Stock Trends.
Winning the Mental Game of Wall Street (W. H. C. Bassetti, Editor) covers the psychology and philosophy of successful investing. We consider it to be the definitive book on the "inner game of market psychology" -- how to understand and manage our own hearts and minds in the often-turbulent, emotional stock market.
Other books by John Magee:
- Technical Analysis of Stocks Trends
- Analyzing Bar Charts for Profit
- Wall Street -- Main Street -- And You
- General Semantics of Wall Street
- The Introduction to the Magee System of Technical Analysis, W. H. C. Bassetti, Editor