The idea behind these directional signals is not to follow everyone else, but rather to fade those pattern players when you are sure they are wrong. Typically, newer traders are looking at the standard Robert Edwards and Magee trading patterns 1 for trading signals. They make an excellent group to feed off, if you can determine what they are doing and when they are likely to panic. These signals work best when these traders have the time to get in the trade the wrong way. That's why I look at daily, weekly, and monthly pattern Failures. While the higher Time Frames hold the more secure probabilities, some pretty dramatic results can be achieved from certain intraday pattern Failures.

THE HEAD AND SHOULDER FAILURE

FIBONACCI SUPPORT

The above idealized example illustrates a clear H&S with a break of the neck line, a bit of consolidation below it, then a close back above it. The subsequent action is expected to be strongly up because the short selling pattern players are caught wrong, and must

Robert Edwards and John Magee, Technical Analysis of Stock Trends

unwind their positions. The lower portion of the consolidation after the break of the neck line may be supported by a significant Fibonacci level. If it is, you will have some advance warning that a Failure is coming and you can enter according to the Fibonacci tactics taught in CHAPTER 13. It isn't necessary however, that such support causes the subsequent Failure. What's necessary is that (he Failure occurs. Anticipate this pattern at your risk. Ifyou anticipate this signal before it crosses the neck line, you will be trading against a classic pattern and you would also likely be against the prevailing trend. Remember, you are not taking the classic sell signal, rather the Failure (buy), if it happens.

FAILURE SUPPORT AT A FIBNODE COMPLEX RIGHT SHOULDER

The bond weekly Chart 6-18 shows a picture perfect example of this phenomenon. We have strong Fib support below the neck line. Time for players to "get wrong" (two to three weeks) followed by a subsequent sharp move up, trapping those pattern players. This weekly action would be the set up for the trade. You would enter on the daily Time Frame.

The daily chart illustrates how powerful and rewarding this signal can be. The idea is to drop your Time Frame to enter the trade, once the setup is apparent.

Ifyou are observing the pattern Failure on a weekly chart, you can enter on the daily. If you are observing the phenomenon on the daily, enter on the hourly. The specific entry techniques you would use will be covered later in this book. Ifyou hesitate, you can easily get left behind!

NOTE: These types of pattern plays are particularly rewarding if they are widely promoted in a specific market, particularly on TV programs, or in a widely-followed newsletter, or fax service.