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How to Interpret Stock Sideways Patterns?

How to Interpret Stock Sideways Patterns?
June 14, 2019 Martha Stokes CMT

How to Interpret Stock Sideways Patterns?

Tips to Identify Them & List of How They Are Different

There are hundreds of strategies that have been developed for sideways action, but still Technical and Retail Traders have meager gains or chronic losses during Sideways Market Conditions. This is an important trend to master as the markets now trend sideways more than 60% of the time, often in patterns that are not recognized as sideways.

Below is a chart example using a weekly view, showing the type of analysis that all traders need to be capable of doing within seconds of seeing a chart.

This chart has a short-term Bottom Formation that is sideways called a “Basing Bottom” which is one of the newer bottoms that form on the short-term trend. The compression out of this bottom creates moderate momentum.

In this chart example the compression candlestick patterns are occurring after each run, which are lasting an average of 3 days. Candlestick entries are based on resting day action with a “Shift of Sentiment™” on the Accumulation/Distribution Indicator. Volume defines High Frequency Trading activity, however Professional Traders are in control of price in this chart example.

Here are some Tips to Identify Sideways Patterns:

  1. Bottoming Formations are predominantly sideways.
  2. Topping Formations are also mostly sideways.
  3. Platform Market Conditions are lengthy sideways action in a tight formation, that whipsaws Swing and Day Traders out of potentially good entries.
  4. Consolidations are common when Professional Traders are actively trading.
  5. Compression Patterns are frequently overlooked by traders.
  6. Trading Ranges are also sideways, but are often mistaken for Momentum Runs.

Here is a List of how Sideways Patterns are Different:

  1. Amplitude of Oscillation. All sideways action is a form of Oscillation.
  2. Magnitude of individual candlestick size.
  3. Dimension of the typical time duration of the sideways pattern, based on magnitude and amplitude.
  4. Typical location of that particular sideways pattern whether it forms in the short-term, intermediate-term, or long-term trend.
  5. Trendline patterns that the sideways patterns create.
  6. The most reliable candlestick patterns for Day, Swing, or Position Trading entries.
  7. The type of Support or Resistance that sideways patterns create which defines the risk of the trade.
  8. The amount of acceleration, velocity, or the price action as that particular sideways pattern completes.
  9. The direction the stock will take as it breaks out of that particular sideways pattern.
  10. The indicators to use for that particular sideways action for optimal entries and exits, and maximum profit gain potential.

Summary

Basing Bottoms often have compression patterns that follow the completion of the base bottom. These are short-term Momentum or Velocity Runs that pause and rest at or below weak resistance out of that bottom.

Most traders do well during Uptrending Markets when there is either Moderately Trending action, Momentum Runs, or Velocity Runs. However the preponderance of traders struggle during Sideways Trends. This is true whether the trader is trading Stocks, Exchange Traded Funds, E-minis, or Options.

Go to the TechniTrader Stock Market Learning Center and watch a training webinar.

Trade Wisely,

Martha Stokes CMT

TechniTrader technical analysis using a FreeStockCharts chart, courtesy of Worden Bros. and FreeStockCharts.com

Chartered Market Technician
Instructor & Developer of TechniTrader Stock & Option Courses

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Martha Stokes, CMT is co-founder and CEO of TechniTrader. She is a retired professional Buy-Side Analyst and was awarded the Chartered Market Technician designation for her thesis, "Cycle Evolution Theory." Martha is a passionate teacher of the financial markets and a prolific writer, having created over 40 stock, option, and financial market courses.