The primary purpose of this lesson is to give you something to keep on your desk which illustrates the most common Reversal Bar Patterns that most often precede a move in the opposite direction.

You will see these patterns at key alert zones (inflection points) such as Pullbacks to Moving Averages, Support/Resistance Fibonacci Extensions and Retracements in addition to Trap Doors (both ways) and Volatility Bands.

The second key point is to strongly emphasize that the alert zones are just numbers and you don't buy or sell the number. When the stock/future gets to the key zones, you should be looking to enter the trade on the Change in Direction Pattern, with reasonable stops to manage your risk.

Another key point I want to emphasize is that the sequence of your identification of potential extensions and retracement levels precedes and anticipates a reversal pattern occurring in that alert zone.

It is most important that you don't enter the trade without the Change in Direction pattern. It is a fact that it will be a higher-probability trade when it converges with the inflection point and the Market Dynamics at the time of your trades.

The following graphic illustration gives you eight common two- to four-bar patterns. There are other multiple bar patterns that form up a lot after the initial patterns shown below that I cover in my seminars.

I have included five charts (candle and bar) that illustrate inflection points combined with basic Change in Direction patterns.

You should note that all of the pattern examples above have setup bars with closes above the midpoint (below for sells) which indicates some degree of buying or selling pressure.

This along with range and volume tells you an important story.

Chart 1

This chart gives you examples of some patterns without tying them to the inflection points which we will do on the next chart.

Chart 1
Five-minute Chart of S&P 500 Cash Index (SPX) with
5-period EMA of the last sale, 8-period high and 8-period low moving averages

In the chart above, you recognize the first pattern of the day which is a Trap Door narrow-range Doji setup bar.

After advancing there is a 3-bar pullback setup with a Doji bar (open and close at top of range).

It makes a significant high on a narrow range Inside Bar pattern with a close at bottom of range.

The ensuing leg down has three different retracements back to the 8-period SMA of the high, all of which failed. Note the narrow-range bars at the top of those setups.

The subsequent bottom, marked on chart, is another Inside Bar Pattern with a close at top of range.

Chart 2

This chart is identical to Chart 1 except that we combine some key inflection points with the basic reversal bar patterns and it is extended in time.

Chart 2
Five-minute Chart of S&P 500 Cash Index (SPX) with
5-period EMA of the last sale, 8-period high and 8-period low moving averages

Putting numbers on the inflection points, it plays out as follows:

The first Trap Door setup at the 1162.25 low is excellent as it converges with the long-term .618 RT of the October '98 923 low to the March '00 1553 high. 1164 is the .618 RT level. This setup was also at an extreme volatility band.

This first leg up to X (1118.50) was a 2.3% contra rally that ended with an Inside Bar Reversal Pattern that was right at the .786 RT of the previous 1197.66 high (didn't fit on chart). The .786 RT is 1189.90.

The first part of the leg down stopped at 2, retraced to 3, the 8-period SMA of high, gave you a narrow-range bar reversal pattern and then a 1,2,3 short below swing point 2.

Before the bottom at A, 1155.35, note the two rally attempts that failed at the 8-period SMA of high. The bottom at 1155.35 is exactly the 1.27 extension (1155.16) of the W to X leg up, and also at the 2.0 Volatility Band level.

Extensions and retracements are very common for the major Indexes and big-cap liquid stocks. The 1.27 and 1.618 extensions are most common but extreme extensions can run to 2.24, 2.618 and 3.14. That's why you don't enter until you get a Change in Direction pattern.

The rest of the chart shows you a leg up from A (1155.35) from an Inside Bar Reversal Pattern to the 1171.63 top at B, which ended with a narrow-range reversal, trading down to a retracement bottom at C (1157.75).

Note that 1158.89 is the .786 RT of the A to B leg. From the C low, you got a 3-bar Reversal Pattern that gave you another good upside pop as it also broke above the 8-period SMA of the high coming out pf the pattern, which is high probability.

You should note also that in the XA leg, the 1,2,3 short entry also broke below the 8-period SMA of low.

This was certainly an extremely volatile day but if you were familiar with this kind of sequence trading, it was very logical and had structure.

Chart 3

I have included the same day chart of the NYSE ticks below, which shows you a positive divergence in ticks from -1065 to -809 as the SPX made the 1155.35 bottom at the 1.27 extension and 2.0 Volatility Band. In "Sequence Trading," everything is related when deciding to take a trade.

Chart 4 adds another dimension as you see that the AB leg to the 1161.69 B Top is a 1.27 extension of the XA leg.

The difference is that the X high of 1157.35 is from the previous day.

It is mandatory that you check multiple days and time frames to capture significant inflection levels.

You can observe common reversal bar setups starting with the Trap Door, extension top reversal bar, and then a defined Symmetrical Triangle that comes out the bottom, below all of its EMAs.

There was a good pop into the close from the 1136.26 bottom at C which is right on the 1.27 extension (1136.53) of the AB leg up.

Chart 4
Five-minute Chart of S&P 500 Cash Index (SPX) with 8-, 20-, 60- and 260-period EMAs
AB = 1.27 XA @ 1161.52
BC = 1.27 AB @ 1136.53

Chart 5

This chart is meant to give you another building block to the "Sequences." The Dow dropped like a knife on the opening and down to 96.96 where you got a Trap Door reversal setup.

You could have taken the earlier narrow range Trap Door but probably would have been stopped out below the low of the narrow-range bar as it traded to 96.90 especially in current market conditions.

The Trap Door after the low of 96.90 was an exact 1.27 extension (96.91) of the XA leg up from the previous afternoon.

The BC leg was a 1.618 extension of AB at 98.95 right at the C top of 98.83.

After that, it was the same as the SPX in Chart 4, except the bottom before the last run up was a double bottom with your basic reversal bar entry pattern.

Chart 5
Five-minute Chart of Dow Jones Industrial Average (DJX) with 8-, 20-, 60- and 260-period EMAs
AB = 1.27 XA @ 96.91
BC = 1.618 AB @ 98.95

Summary

If you keep this lesson on your desk and do the work, and adhere to your stop disciplines, you will be profitable.