How to Identify the New Top Patterns Sooner
One of the challenges for Technical Traders is learning the new Topping and Bottoming formations that have emerged in the past few years. The Sell Short Topping Formations in the current market can be a surprise for traders. Topping and Bottoming Formation changes have occurred as the internal Market Structure evolved into a far more complex system of venues with a plethora of new order types, routing systems, and order controls, that were especially for the Dark Pools and Twilight Pools which are permitted to delay orders and hide huge quantities of liquidity.
The popular and well known tops of the 1970’s to 1990’s started changing shortly after the SEC and FINRA enacted the decimal system for pricing structure for stocks. The venerable fractions were eliminated with the intent of squeezing out the rouge Pro Day Traders who jumped in ahead of the giant lot orders using the advantages of wide spreads. Decimals shrunk spreads down to pennies, and then half-pennies for the professional side.
High Frequency Trading firms evolved out of the Pro Day Trading Market Participant Group to cope with the tight penny spreads. This altered order routing, order types, and increased the number of venues. Technical patterns changed, morphing slowly into the new Topping and Bottoming Formations that now form on charts. Unfortunately many Retail and Technical Traders have fallen behind in learning these new patterns.
The chart example below is for Unitedhealth Group, Inc. (NYSE: UNH) which has one of the new Topping Formation.
The top actually starts in March of 2015 as the Accum/Dist and MFI indicators diverge from price, revealing Quiet Rotation™ by giant funds hidden from exchange traders on Dark Pool venues. Price continues up as Dark Pools intend. As buying power of Smaller Funds and the retail crowd dissipates, the giant lot orders selling on rotation patterns weakens the uptrend, shifting it sideways. This at first glance doesn’t look anything like the Topping Formations every Retail Trader knows. It looks like a sideways pattern that is going to break to the upside. The Money Flow MFI and other large lot indicators reveal however, the negative divergence pattern warning that this is indeed what is called a “Flat Top.” This is one of the Sell Short Topping Formations in today’s market. Selling for profit quickly reverts to Selling Short and similar to the day of the Asian Market Meltdown, the stock collapses and then quickly rebounds on buy to cover. However the Indicators still reflect sell side pressure.
The new topping formations that form in todays automated market do not look like tops but often appear to be sideways action or resting periods. The Sell Short Topping Formations suddenly break to the downside without any price pattern directional warning. Traders who use only Price and Time Indicators often are on the wrong side of the trade, having bought the stock just as it starts to plummet. How to identify the new Top Patterns sooner is by adding additional Volume and Quantity Indicators to your indicator set. These can improve your ability to see rotation and selling pressure, not visible in the price chart or price indicators until after the stock drops sharply.