April 2008

Commodity Timing
Patterns Upon Patterns
Our 2008 second quarterly report focuses on 3 trading patterns you can use in all markets all time frames. Technical analysts seldom agree on much of
Volume 43 1

Commodity Timing

Issue 1

1969-2008 i ng

Contents
Patterns Upon Patterns The Story Of Frankie Joe Hot Hands Turn Cold 1 7 8

anything; one will say the trend is up, another says it's down, while a third analyst says the other two are wrong. But they all will agree that patterns matter... that there are patterns to indicators, oscillators and daily price fluctuations that can act as a guiding light to future performance. I happen to agree with that viewpoint, that in fact there are patterns in the marketplace that can be quite helpful to an individual trader. This month I would like to show you several of those. Let's get right to work with the first pattern that focuses on two consecutive inside days. Inside days are, indeed, the blight of chart readers. They occur about 15% of the time and are a good indication of confusion in the marketplace. The fact the market cannot make a higher high, or a lower low, than the
Copyright 2008 Larry Williams

Another Pattern New Lows 11 Dancing With The Devil 17 18

1937 Sell Pattern

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prior day is a strong and powerful message, telling us the market can't find direction. It has become locked up in Chartists Jail. So, imagine what happens when we get two consecutive inside days...two days in a row where the market cannot expand its price movement. Two days in a row where price trades in a very small range. Does this have significance? Does it mean anything? I have called this pattern the Double Inside Pattern. This pattern can be identified in your charts, at least in Genesis, using the following code to create a paint bar: High > High.2 and Inside Bar.1 and Inside Bar.2
Volume 43 2 Issue 2

Since we are requiring that today's high exceeds the highest high of the two inside days, we could assume a buy point at the high of the first inside day. Keep that in mind as you look at the following charts; that would have been our entry point for a short-term buy signal. You may want to think of it along these lines... if you see two consecutive inside days, you can then place a buy stop at the high of the first inside day. There are, of course, other ways of working with this pattern, but let's start with it on the most simplistic terms to see how effective this pattern might be.

A Crude Oil Trade

That's all there is to this pattern it is no more complex Chart 1: Crude Oil Double Inside Pattern than what you see in the above code. What it represents is two consecutive inside days, and we Chart 1 shows this unique configuration are not looking or caring about the direction of the close on either of those days. Nor are we establishing itself three times in the last seven months of trading. This is not atypical, as this caring about the direction of the close of the pattern does occur with some frequency. I day prior to the first inside day. have marked off with the blue boxes the day prior to the inside dynamic duo occurrence. What we are caring about is that today's high The top of the blue line represents the high of exceeds the high of the first inside bar; that is the first inside bar, your buy point. represented by High > High.2.

In these examples the market moves straight away following the break out. You'll find that this is typical. It is not an anomaly.

Commodity Timing
prices spurted substantially higher following the breakout.
Volume 43

S&P Is A Different Ball Game

Euro Fx As Well

The double inside pattern shown below in October 2007 suggests that this pattern is not unique to just one or two markets. It is one that takes place in virtually all markets. It appears the buy Chart 2: S&P Double Inside Pattern signals work better in up trending Well it is markets. However, that is not clear the always the case. If you study pattern works in the S&P as you can see in the enough charts you'll find there are also some chart above. If you take the time to paint bar very good buy signals developing from this your charts with this configuration, you'll find pattern when prices have been coming down. it is a rare occurrence in the S&P 500, while it is a frequently occurring pattern in the other markets. I'm not certain why it is this way, but it certainly is and is something I suppose you should be made aware of. In Chart 2, the market was in a nice strong uptrend. Two inside days developed, and

3 Issue 2

Chart 3: Euro FX Double Inside Pattern Example 1

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Volume 43 4 Issue 2

operates there as well. The key to intraday charts however is not just a pattern but the time frame you use. I like 30 minute bar charts for the S&P 500 (Chart 5). For the electronic markets with large time periods of small price ranges, another approach must be developed. I will address that at some other time, but just be aware that during the twilight Chart 4: Euro FX Double Inside Pattern Example 2 hours of the electronic sessions these patterns will Another example of this pattern is shown not be operative. in Chart 4, and in this instance the rally didn't last long...the buy had a potential for a little over $1000 per contract, but it Getting In Is A Start, Getcertainly did not lead to a substantial trend ting Out Is The Art move. That is not unusual. One could have been looking for a much higher move as the By now I assume that you understand the trend was up, and all that good stuff. But pattern and the entry technique, so let's turn the markets are the markets, and you simply don't know for sure how long these moves will last. In a moment I will address stop loss points for the pattern.

Intraday Charts As Well

I have looked at quite a few intraday charts and also see the pattern

Chart 5: SP 500 Double Inside Pattern Intraday