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How to Identify New Candlestick Pattern Topping Formations?

How to Identify New Candlestick Pattern Topping Formations?
October 11, 2019 Martha Stokes CMT

How to Identify New Candlestick Pattern Topping Formations?

Add Volume & Quantity Indicators to Analysis

One of the challenges for Technical Traders is learning the new Topping and Bottoming Formations that have emerged in the past few years. The Topping Formations in the current market can be a surprise for traders. Learning How to Identify New Candlestick Pattern Topping Formations, is by including additional Volume and Quantity Indicators with those you are already using. These can improve your ability to see Dark Pool Quiet Rotation™ and selling pressure, which are not visible on the chart or indicators until after the stock drops sharply.

The chart example below has a new “Flat Top” Topping Formation.

The top actually starts as the Accum/Dist and Money Flow Index MFI Indicators diverge from Price. This reveals Dark Pool Quiet Rotation by giant Buy Side Institutions whose orders are hidden from traders in Dark Pool venues. Price continues up as the Institutions intend. As the buying power of Smaller Funds and uninformed Retail Traders dissipates, the Buy Side Institution giant lot orders selling in Dark Pool Quiet Rotation patterns weakens the Uptrend, shifting it sideways. This at first glance does not 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 Index MFI and other large lot indicators reveal a negative divergence pattern, warning that this is indeed what is called a “Flat Top.” This is one of the new Candlestick Pattern Topping Formations in today’s market. Selling for profit quickly reverts to Selling Short and the stock collapses, then it quickly rebounds on Buy to Cover orders. However, the stock chart indicators still reflect a sell side pressure.

Topping and Bottoming Formation changes have occurred as the internal Market Structure evolved into a far more complex system of venues. There is now a plethora of new order types, routing systems, and order controls. These are especially for the giant Buy Side Institutions using Dark Pools and Twilight Pools, where they are permitted to delay orders and hide huge quantities of shares.

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The popular and well-known tops of the 1970’s-1990’s started changing shortly after the Securities and Exchange Commission (SEC) and Financial Industry Regulatory Authority (FINRA) enacted the decimal system of pricing structure for stocks. The venerable fractions were eliminated with the intent of squeezing out the rouge Professional Day Traders. They were jumping in ahead of Buy Side Institution giant lot orders, using the advantages of wide spreads. Decimals shrunk spreads down to pennies, and then half-pennies for the professional side of the market.

High Frequency Trading HFT Firms evolved out of the Proprietary Professional Traders 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 Traders and Technical Traders have fallen behind in learning these new patterns.

Summary

The new Topping Formations that form in today’s automated market do not look like tops, but often appear to be sideways action or resting periods. The 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.

Go to the StockCharts.com Users Learning Center and access a webinar on Exploit the High Frequency Traders, Momentum Power Trading Explained, and the Trade Management Planner.

Trade Wisely,

Martha Stokes CMT

TechniTrader technical analysis using a StockCharts chart, courtesy of StockCharts.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.