Well, Friday is finally here and I will be taking in one more day of sandy beaches before I make my way home Saturday. This "Greatest Hit" I am re-publishing was a group trade that most readers of the site had been involved with. It was a trade that had ups and downs, but those who were able to stick to the plan that was outlined had wound up reaching the target price that had been established upon taking the trade. This particular post discusses price pattern failure. Enjoy.

Too many e-mails rolled in to me today telling me how CTSH failed it's ascending triangle pattern. I beg to differ.

In order to correctly identify entry and exits while trading patterns, you must be able to draw a line in the sand that states when a pattern has failed. Think of pattern failure as a way for a trader to determine the likelihood that the stock will still make a reasonable attempt to achieve it's target price. If it moves beyond a certain point in the pattern, this substantially reduces the LIKELIHOOD that the target price will ever be achieved. Let's take another look at CTSH.


I have drawn the triangle pattern on the chart, and you can clearly tell when the signal was generated. 9/13 provided a close above resistance on heavy volume. This is your signal to enter the trade...but how can you tell when the pattern has failed?

Actually there are two ways to determine pattern failure. One will happen before you get a trading signal, one will occur after you enter the trade. Let's assume we are in a trade on CTSH. We got in on the 13th according to our signal, but we are losing money right now after a recent retracement.

Have you ever heard that after resistance is broken, it will become new support? That fundamental understanding of support and resistance applies to this particular trade. Now that resistance has been broken, that should become new support. NOTE: This is really important...Make sure you draw support and resistance lines with a crayon rather than a razor sharp line. That means your line should be an area more than a specific dollar value.

$71.50 was an old resistance for CTSH. After the breakout has come and gone, the price has come down to re-test old resistance as new support. If this has you worried, STOP BEING SO EMOTIONAL! You need to anticipate this and be willing to give the trade this flexibility to stop here and bounce. If it does not bounce and move higher off this new support line, and trades back into the pattern, this is when you consider it to have failed. A close above or below an old support/resistance level confirms your pattern has failed.

With a better understanding of this, you should be able to be a little less unemotional and more systematic in trading these patterns. So far what you see happening in CTSH is textbook. In fact, many traders wait for this signal instead of the breakout to enter this trade. I for one do not do this since it doesn't always re-test after the breakout. Maybe only 60-70% of the time.

If you are thinking about sending me an e-mail challenging the level of resistance drawn, or things like that, save your breath. The wonderful element of price pattern is that the analysis is subjective. You may not agree with me (and you are wrong... just kidding :) and that's great! It's an art, not a science. Once you get familiar with what a pattern should consist of, the consistency of where the prices move within the pattern, you will be able to see these patterns more clearly, and you will be able to draw these lines based on your own personal perspective.