How Technical Analysis is Used Against You

For hundreds of years the Japanese rice traders have used “Candle Stick charting” and it’s only been in general use in the US for the last decade or so, but they are fairly reliable patterns because like most technical analysis, once you understand it, it is simply a view into human emotion and because human emotions like fear and greed and timeless, these charts still work and will continue to work.

A hammer is a formation that signals a reversal to the upside. A few things that qualify a hammer as such are that it has a preceding downtrend, the more significant the downtrend, the more significant the hammer, especially if it falls at a support zone. It also needs to have a real body-(the candle portion) at least twice as long as the lower wick and it should generally look like a hammer. You can remember the formation with this easy saying, “The market is hammering out a bottom”

Click the chart above to learn more about Hammers.

Earlier today at 11:35 a.m. I posted my views for the day. I said that we did see the early upside that the short 3C charts were predicting, and that the pullback had done some technical damage, but I thought it was contained. Here’s where the analysis gets good,

Seeing this thus far, if we do have a close up, which I still think is more likely, we should see 2 things, a “Tweezer Bottom” and a “Hammer” candlestick-both are reversal signals (to the upside).” 

” I would be cautious though as I do believe they will take price below the support level to shake out stops and trap shorts before they take it back up.”
Both events transpired as you’ll see in the charts below. Be sure to click on them to read any annotations.


Here is the support level, at the time I posted the analysis, all that had happened before the post was multiple tests of the support level that all held support, 3C suggested we’d see some downside short term action ( a break of support).
Here is the lesson!
Part of what I offer at Wolf on Wall Street are ideas that work in today’s market. Technical Analysis was once considered “voodoo analysis” , but over the last decade it has become mainstream and everyone seems to be using it. In the past , Technical Analysis would suggest that a support level like the one we see above should hold and prices should go up from there. At Wolf on Wall Street  we try to give you the reality of the market and here at Trade Guild as well. 
The reality is that everyone is watching the same support level on the SPY, many people are buyers as price hits the support level. The truth is the middle men that facilitate transactions-market makers on the NASDAQ and Specialists on the NYSE can see the same support level and know how the mainstream technical analysis crowd will react. So, I said there’s a probability that they will take prices below these levels and then run them back up-3C confirmed this. The middlemen can see every limit order or any order placed in the system, so they know that if that support level breaks, the longs who bought above will be at a loss and many will sell. Two things happen that benefit the middle men here, one is that they get to pick up shares that they know will appreciate at a cheaper price to put into their inventory. The second benefit is the bid/ask spread. A market maker may offer shares for sale (the ask) for $112.75  and they will purchase shares  (the bid) for $112.71, a small difference of $.04, but when that level breaks and the market maker can cause the level to break, it creates a lot of volume as all of the orders in the system on limit stop will be triggered, so we saw a period of about 10 minutes when volume surged at least 5x the average volume before. I estimate that spike to be 18,244,100. At the .04 spread that translates into a profit of $729,000 in 10 minutes. Not to mention the shorts that will jump in on a break of support because the tenants of technical analysis say that when a support level is broken, you should go short (in effect). Once the middlemen run price up back above the broken support level (which is now resistance) these new shorts are at a loss and they start to cover (buy) which adds fuel to the rally. So the middleman made the spread plus bought shares cheap and used a mini short squeeze to propel prices higher where they could sell. Lets assume half of that volume (9 million shares) at an average price of $112.20 is what they stocked up on, and lets assume they sold that inventory around $113.90 in the afternoon, they made another $15,300,000. All of that money for doing one thing, taking the standard technical analysis that everyone uses and turn it against them. This is why I teach a new reality in technical analysis here and especially at Wolf on Wall Street.