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Technical Education

BLANK BOX™ TRADING: A Self-Developed Daily Preparedness Strategy

Blank Box™ trading a technique that I’ve developed over my career. It is very simple, as is everything that I do. Basically, it’s adding space for the next day (or days/weeks) to estimate a stock’s future anticipated time frame and move. It will help you make quick decisions on breakouts and help you “hold the line” during times of consolidation. This method works for all time frames and all stocks and markets. It also works with all technical patterns, such as neutral channels, symmetrical/ascending/descending triangles, flags, pennants, wedges, tops, bottoms, etc. I will cover long-only patterns in this article.

Some people say that technical analysis is “hindsight”, and that my blog posts are also “hindsight”. Bullshit. Those people are the dumbest box of Pet Rocks (le Duc, et. al.) that obviously have no trading foresight whatsoever. This kind of thinking also demonstrates a lack of experience and tactical strategy. True, technical analysis looks at past price performance to determine future movement, but why do patterns work and why are they so reliable and repetitive?

The answer is because the markets are driven by human behavior, so as long as humans are still trading, it won’t change. Humans are emotional creatures. It is not about hindsight, it’s about looking into the future. After all, aren’t all styles of trading about looking into the future and attempting to get in prior to a move? Take a look into my crystal ball:

The Purposes of the Blank Box™:

1) Determine low-risk, high-probability entry and exit points
2) Predict bounces and pullbacks intra-day
3) Psychological self-control

Let’s take a look at a real-time, and not a “hindsight” example, of PCU, currently trading at $19.46:

Below is a 45-day of PCU. I have also added 2 weeks of “blank days” to nearly complete the apex of the symmetrical triangle. It is important to note that the box remains constant, but price does not. If a breakout were to occur on Tuesday, I would be looking at the gap up to start at around ~$20.70. Likewise, a breakdown would be indicated by a gap down below ~$18.30. If the consolidation continues, the box becomes more narrow as each day passes and may morph from a ~$2.50 range to a ~$1.25 range.

Let’s look at my early morning Friday post on the SPX. The first chart is the 3-day chart with Friday being the “blank day”. The chart below the first one is what actually happened on Friday.


I wonder why people make trading so complicated with pages of fundamentals, zillions of technical indicators, spreadsheets with time-consuming data, and everything else that is completely unnecessary, when in fact, trading is so simple. Keep it simple folks. My 10-year old cousin, my protégé, is up over 20% this year, putting most institutions to shame. FYI – she starts middle school in the Fall.

Creating the Box

How do you make one? The boxes are dependent on two (three) important factors:

1) Time – what is the time frame?
2) Pattern – what kind of pattern is it?
3) Your drawing skills and knowledge of basic Geometry.

I laid out examples of the SPX and PCU for a reason. The SPX was forming a neutral range and therefore, it needed only one blank day. PCU is currently forming a symmetrical triangle and the apex is farther away. The time aspect depends entirely on pattern, and more importantly, the pattern aspect determines the time. Once you get this down perfectly, you’ll be able to win so much that people will think you are a goat-sacrificing devil worshiper.

Let’s take a look at a two more real-time, non-hindsight, examples below:

1) HBAN, $4.24, pennant-down sloping

2) CEG, $25.62, triangle-symmetrical

Caveats

Too good to be true? Sometimes. Why? Because nothing is perfect. The most common reason for loss is if the move outside of the box is a false breakout (or breakdown) which pulls back (or throws back) into the box. This is an immediate cause to exit the trade without any hesitation. You will take small losses along the way, but your gains should outstrip your losses. Cut the losses quickly, because if you are right about it, then you will have saved yourself a headache, and if you are wrong, then you can always re-enter anyway.

I believe that the second most common reason is pattern failure. Sometimes, patterns just don’t work out the way the textbook states. You just simply get out and move on.

Trading is about making money, not about how smart you look or sound. Remember to keep things simple. Trading is hard if you make it hard. Likewise, trading is easy if you make it easy.

Hope you had a great Memorial Day Weekend. As always, I will answer any questions below.

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7 COMMON BREAKOUT PATTERNS (Educational)

BTFO!

If you’ve been following me for the past 6 weeks, you know that I have called breakouts almost immediately before they do so. I was asked by dozens and dozens of people to provide some sort of educational post on what I lookout for. The primary patterns that make it on my imminent, potential, and waiting lists are as follows: 1) parabolic breakout+symmetrical triangle, 2) bull flag, 3) ascending triangle, 4) failed descending triangle, 5) rounded bottom, 6) flat base, 7) measured move.

Each pattern must utilize price action, volume, moving averages (15, 20, 50, 100, 200-day), and the development of the pattern itself. The entry point is marked when everything “lines up perfectly”.

1) Parabolic Breakout and Symmetrical Triangle:


These patterns are the intra-day spikes that I covet dearly. They are responsible for many of the fastest and largest gains that I have ever achieved. This pattern utilizes 2 or more continuation or consolidation patterns to complete itself. They are usually flat bases, flags, and a variety of triangles. When the pattern goes parabolic intra-day, there will usually be massive profit taking and the entire move could retrace as much as 50%. Most weakhands would sell in panic when this occurs. However, this is wrong.

After a large move, the pattern needs to consolidate it’s gains, shake out the weak holders, attract the dip buyers, and gather accumulation and interest for the next run up. Towards the end of the consolidating period, there will be another breakout, which marks a secondary entry to add another position.

Volume must be flat and declining prior to the spike, which will be accompanied by huge volume. In addition, the moving averages listed above will help guide you to time your entry. My favorite short-term averages are the 15- and 20-day MA’s. 50- and 100-day MA’s are intermediate averages, and the 200-day MA is the big daddy himself – the most important long-term MA.

Whenever you see a symmetrical triangle form after the initial spike, it is almost a guarantee that the particular stock will breakout again. Failures are rare, but they do happen.The point is to harvest as many of these patterns and cut losses on any of the failures.

2) Bull Flag:


Bull flags are usually very small and can last for only one day or several weeks. The way to tell the entry is by using the appropriate moving averages. Sometimes, I like to enter a flag regardless for fear that I may miss the breakout. However, the closer the pattern is to the 15- or 20-day, the faster the breakout will materialize.

3) Ascending Triangle:


The ascending triangle is one of the most obvious bullish patterns, and one that is highly reliable. Each trough is marked by selling exhaustion while the buyers hold their ground. You want to either get in on the breakout from the pattern or if you are more tolerant to risk, then enter within the pattern and just sit tight. Do not get shaken out.

4) Failed Descending Triangle:


Sometimes, when a pattern fails, it can be a good thing. A pattern failure will force holders on one side of a trade to immediately reconsider. A descending triangle is a bearish pattern but occasionally, it will fail. This will force short covering and a great time to add longs at the same time. I like to get in on the breakout on confirmation.

5) Rounded Bottom:


This pattern takes months, even years, to develop. The pattern is created by a downtrend, followed by a sideways neutral range. When the right side of this “saucer” develops, it will be obvious that the stock/market wants to go up. There should be a massive increase in volume on the breakouts following the final completing of the right side of the pattern. Shorts will cover their positions as they realize that they can no longer profit from the stock.

When the multi-month base is forming, the main moving averages should catch up to the stock. They should level off and start heading higher and support the stock as a “launching pad” for continuous breakouts.

6) Flat Base:


A flat base is basically an over extended flag trading in a neutral range on low volume. These patterns have one of the most powerful breakouts, ever. A stock can easily double in a matter of days/weeks. There should be no evidence of breakdown in this pattern and they should be entered immediately when you first find them. When the breakout occurs, it its highly likely that you never see pre-breakout prices for a long time.

7) Measured Move:


The measured move pattern is one of the most beautiful and predictable patterns. They easily launch from their supporting moving average. The best part is that several moving averages should provide support below the stock. They act as back up in case there is a failure.There should be decreasing volume during consolidation, followed by large volume breakouts.

I hope this helps.

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