It's Not What You Call the Pattern, It's How You Use It
Back in August, I threw the above chart on Twitter with the comment, “Quadruple top in place on AMZN. I don’t think I’ve ever seen this before.”
Little did I know the shit storm I was about to stir up.
First, I was told that there was no such thing as a quadruple top.
Next, I was informed that my pattern recognition was in fact wrong, as many of the Twitterati weighed in with their alternative suggestions.
Like a rising triangle.
A bull flag.
Even a “W.”
Other suggestions included a “Shelf,” a “Barrier Triangle,” as well as the always popular, seen on every chart by every bear “Head and Shoulders” pattern.
The only things more varied than the patterns suggested were the interpretations of each.
Allow me to settle this once and for all.
When I was a kid, my father asked me to help him out with the installation of our new sprinkler system.
“What do I do?” I said.
“I need you to help me dig the trenches that the PVC pipes will go in,” he replied.
“No problem,” I said. “What do you want me to use to dig them?”
“Right there,” he said, pointing to the tool leaning against the shed.
“You mean the shovel?” I said.
“Yes,” he replied.
“The digger? The spade? The excavator? The trowel?”
“Yes, yes, yes, just start digging,” he said, half-annoyed and half-proud of the gently smart-assed son he’d raise to be such.
As for what I called the tool, he didn’t really care, as long as I knew what its purpose was and how to use it.
Let me illustrate.
I once had a brief Twitter convo with a follower who has been getting progressively shorter on Apple that wasn’t working out so well.
I asked him/her this question.
“I’m still betting on China and the U.S. escalating their trade war, eventually decoupling,” came the response.
“Okay. How will you know if you are wrong?” I replied.
“Excellent question, lol.”
I had a similar conversation with a friend of mine a few years ago. He’d gotten a tip about a “story stock” in the energy space and had put some money into it.
I asked him what the bullish case was for the company, to which he replied, “It all depends on how the elections go in Peru.”
I think just speaking those words out loud made him pause.
I have no insights into the socio-economic negotiations going on between the U.S. and China.
I dated a girl from Peru in my 20’s and remember drinking a horrible Peruvian lager called Pilsen Callao, but I don’t know who the political parties are in her homeland or what their platforms say regarding oil exploration.
And even if I did have these insights or answers, I wouldn’t know how to interpret them, let alone know how the market would.
I’m not that smart.
It doesn’t matter what this pattern is called.
It’s a tool. You can use it in a number of ways, depending upon your interpretation.
Here’s a couple of suggestions from that original AMZN chart.
Short below the most recent candle with a stop above the “quad top.”
Buy above the “quad top” with a stop below the most recent candle.
And there is any number of other ways you can use this pattern based upon your own analysis.
You can call it the “Bob’s Big Boy Burger Bump” pattern for all I care.
Buy on the second bounce off the bun. Conservative traders can use the cheese as a stop, more aggressive traders, the lettuce.
Seems silly, right? But that is still objective criteria.
And that’s what it’s all about.
Having objective criteria for determining an entry point and your risk/reward ratio - and to know when you’re wrong.
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P.S. It should go without saying - but I’ll say it anyway - all opinions expressed in The Lund Loop are my own personal opinions and don’t reflect the views of my employer, any associated entities, or other organizations I’m associated with.
Nothing written, expressed, or implied here should be looked at as investment advice or an admonition to buy, sell, or trade any security or financial instrument. As always, do your own diligence.