This monthly perspective chart of Shopify (Shop) illustrates a stock in which supply is gradually overpowering demand.
• Three drives to a high (X1-X3) is a common pattern (and one of my favorites). It often marks the end of a trend. ○ Each successive thrust in the pattern covers less ground. This occurs as sellers (supply) become more willing than buyers (demand). ○ The three drives pattern is fractal, in other words, the pattern can appear in all time frames. • The Relative Strength Indicator (RSI) developed a series of lower highs, even as price managed a series of higher highs. This momentum divergence confirms that bullish momentum (driven by demand) became less intense on each successive thrust. • Finally, the MACD is rolling onto a monthly sell as momentum stalls and reverses. • Now price is pounding/testing the strong support zone derived from internal pivots and the most recent low.
There are other clues that all is not right in SHOP. For instance, large bearish reversal bars at each of the successive highs suggest strong handed willing sellers have been actively distributing supply into each rally. Its likely that the same sellers will continue operating. Its also likely that weak hands who purchased during the distribution phase will be forced to liquidate if the market begins to make progress below the pivot support.
In future posts we will discuss how one might use simple patterns like this to develop trading and risk management plans and how to integrate information from shorter, more tradable time frames into the analysis.
Good Trading: Stewart Taylor, CMT Chartered Market Technician
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This played out really well! Thank you sharing. How do you typically gauge the distance in price from X1, X2, and X3?
CMT_Association
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@CViewsTH, If I understand your question you are asking how to measure the distance covered between for instance X1 and X2? Usually your eyes will tell you plenty but you can also use the price measurement tool. The pattern does not always show a reduction of thrust like SHOP did, I think the important development is the three drives. Hope I answered your question.
CViewsTH
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@CMT_Association, Sorry, I could have worded that better. What I wanted to ask was given the values of X1 and X2 could you predict where X3 will conclude?
CMT_Association
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@CViewsTH Sorry I missed this…. I don’t think there is a consistent relationship.