Google (GOOG) has setup the Trader Vic 1-2-3 pattern or a Dow Theory confirmation of a trend change.
As you can see:
- GOOG broke the up-trend after establishing a new 52-week high above $629 (point #1).
- From there, it consolidated and formed what is referred to as the minor sell-off (the lower horizontal red dotted line).
- Prices started to rise but failed to make another new high. This test of the previous high failed near point number 2 (March & April).
- A failure to make a new high is usually (not always) a signal that the trend is about to change. This is where some traders jump in early.
- Lastly, we reach point number 3 where prices drop below the previous short term minor sell-off (this is trend reversal and the signal to short). If missed, you can short on the first failure to recover the major moving averages (or #3 area which then turns to resistance).
This is the pattern I am watching setup in dozens of stocks across multiple industries. I am also watching this pattern to potentially setup in the major indices as well.
Remember, have patience and be prepared to sit on the sidelines for a while as this pattern takes time to build and then confirm (4 months for GOOG). The key word is CONFIRMATION!
You may play GOOG up and down short term but long term, the trend has changed!
Follow me on twitter to watch the stocks currently setting up this pattern (prior to confirmation).
not sure about this. I am leaning towards a reversal to the upside coming soon. couldnt you define this as a double bottom pattern?
Aaron,
The market is all about what each of us believes; our personal interpretation based on past experience.
I see a 1-2-3 but I can’t prove that it will continue to go down. But what I do know is this: a failure to recover point #3 is another shorting opportunity.
A recovery of point #3 breaks the pattern depending on where it goes from there. GOOG will bounce back up but what it does when it gets between $525-$550 is key.
Chris, Thanks for the analysis. I hear some chatter going around of an imminent market crash in June. Do you have any feelings about this possibility?? And what is you overview of the market right now??
Chris,
I struggle with the 1-2-3 reversal and much of technical analysis in general – it seems perfectly obvious after the fact.
The main problem(s) I have with the 1-2-3 reversal is two-fold. First, waiting for the number 2 to show up can be dangerous. V-moves kill the number 2 set-up and continue heading south in a reversal of up-trend and just the opposite for a reversal of a doen trend and never give you the opportunity to re-test the high or the low. I personally missed a large percentage of the up move in the S&P 500 waiting for some kind of re-test or price confirmation. So you never know you are in a 1-2-3 reversal until after the fact. Second, purgatory as I call it (the trading range between 1(top) and 2(low) on tops and reversed for bottoms, is typically quite large. Meaning you could miss out on a 20% to 30% move before you finally get the confirmation of the change of trend. So if you are trying to capture, let’s say 70% of a move, if you wait for the change of trend on the top and the bottom – you probably missed 40% to 60% of the move waiting for the changes at either end.
I have seen this pattern a ton of times, as I am sure you have, but only is it useful after the fact. So, I am curious how you handle?
Thanks,
Paul.
Paul,
Not true. BLK was nailed before the 1-2-3 setup confirmed (April 6 on Twitter – as point #3 setup). I have 2-3 dozen stocks that have formed point #1 and are now staging point #2 and the list is growing daily. The major indices included! Another pattern called a 2B can get you in before point 3 confirms but that carried more risk. The 1-2-3 carries the least amount of risk vs. reward. Keep following me and you will see a ton of these setup and then confirm if the market wants to turn over. If not, they won’t confirm and the trade won’t happen.
Paul,
Go back and read this post from 2008 and take a look at their charts from when I posted and what happened over the next 6 months: http://www.chrisperruna.com/2008/06/05/possible-shorts-trending-downward/
Let me know if you couldn’t have made money after the 1-2-3 pattern. Several of them offered up 50% profits after the 1-2-3 setup. Even more with the 2B trigger.
It works.
Chris,
Thanks for the comments. How do you handle “V” tops and bottoms?
Also, I trade MSFT which has completed a text book 1-2-3 reversal on a weekly time frame. Curious, would you set a target at which you believe the stock should trade down to or do you just go with the trend until you see a reversal, which could be $23 or $13 or …? Last, if MSFT, in this example, were to trade higher, at what price would a trader have to admit the 1-2-3 reversal didn’t develope this time.
Again, thanks for your comments.
Paul.
Chris,
Does a 1-2-3 pattern suggest any target price move?