STIRRUP PATTERN

TRADING
By Daryl Guppy

We first observed and analysed this trading pattern in late

2003 and 2004. In recent
weeks it has reappeared and it develops in the same way.
There is one important difference in
the 2012 iteration. The long term measurement of the stirrup
pattern is no longer quite as
reliable. In 2003/2004 it was around 65% reliable. Now we
find the pattern does not go on to
fully develop so traders need to manage the breakout with
an ATR or CBL volatility based stop
loss. However the stirrup pattern remains a reliable
indicator of a substantial and sustained
breakout.

One of the challenges in fast moving momentum stocks is to

decide how to handle the
inevitable pullbacks. Traders who hold open positions in the
stock use these pullbacks, or price
retreats to take profits. Typically they apply some variation
of a trailing stop loss technique to
achieve this. Many other traders watch these rising stocks
with dismay, regretting they had not
purchased them earlier. When prices do start to collapse,
these traders are alert for an
opportunity to buy the retreat in anticipation of a rebound.

Rebound trade opportunities include finger trades where

prices drop rapidly, then
recover quickly and reach a high equal to the previous high.
These are very short term
opportunities. Some traders use a Fibonacci approach,
buying retracements at particular
percentage values. Their objective is to ride a resumption of
the trend, but they have no firm
idea of how far the new trend might go.

We are interested in a pattern which achieves several things

in these trading
opportunities. They are:
Confirm a high probability of a rebound
Permit the calculation of a high probability target
Set identification and management conditions that are
independent of technical
analysis indicators
We use the stirrup chart pattern for this. This is a three part
pattern, and unless all the
pieces come together, the probability of success is lowered.
Not all retreat and rebounds
conform to this pattern, but when they do, we can trade with
an increased level of confidence.
We call them a stirrup pattern because like a stirrup on a
saddle, they hang in mid air and help
boost the rider into a higher seat.

This is the broad environment where we look for a stirrup

pattern rebound. It starts when
a stock has been moving steadily upwards, or has perhaps
developed a recent burst of good
price activity. This is followed by a retreat, or pullback in
prices. The retreat is strong enough to
trigger an exit for traders who already hold the stock. There
is no doubt that a new downtrend has developed. The retreat
is often much greater than 50% of the previous major price
move, so
Fibonacci approaches are not always a useful guide to
rebound points. This is not a
consolidation pattern where prices move sideways.
What attracts our attention is the possibility that prices may
rebound from the downtrend
and re-establish a new uptrend. The recent up move in
prices has the potential to be the start of
a new uptrend and if we enter early we can benefit greatly.
Traders look for pattern
developments that increase the probability the rebound is
genuine.

The stirrup pattern starts with an upward sloping triangle

that develops at the bottom of
the price retreat. It is not uncommon to see the top of the
triangle set at a well defined support
and resistance level. In some cases, the top of this triangle is
an extension of the bottom of a
failed down sloping triangle. The key feature is a clear
resistance level established over 3 to 10
days. The sloping edge of the triangle starts forms the lowest
point in the pattern.
The base of this up sloping triangle the stirrup does not
have to show continuous
price action in a single direction. This is a requirement when
we use triangle targets. We are not
using the stirrup for this, so we are more interested in the
broad bullish message delivered by
this type of triangle development. The upward sloping trend
line starts from the lowest low in the
price following the original high.
Once the stirrup pattern is confirmed we project two lines.
The bottom line is placed on
the lowest point of the price retreat, and the point which
forms the start of the upwards sloping
triangle. For clarity in the diagram we have projected this as
a blue line to the left.

The second line is projected from the top of the previous

price rise. Again, for clarity, we
show this to the left as a blue line. These two lines define the
upper and lower limits of recent
price activity. They match the retreat and rebound extremes
and the red arrow measures this
distance in cents. This measurement provides the mechanism
for setting the stirrup pattern
price target.

This is where the stirrup pattern is different from an

upwards sloping triangle pattern. In
this case the triangle is used as a confirmation that a broader
pattern is in place. It acts as a
trigger, telling the trader that a stirrup pattern trade is
available.

Once the stirrup pattern is confirmed, the target

measurement is projected upwards from
the top of the previous high. This makes this style of trade
different from a rebound, or finger
trade where the target matches the previous high. The
stirrup trade sets a much higher target
which is generally achieved in a steady continuation of the
trend. Where the retreat has been
characterised by a very strong bearish chart pattern, the
upside target is reduced by 1 or 2 ticks
as there is an increased probability of prices not quite
reaching the target, or completing only a
few trades at this level.
It is not useful to use the classic measurement of the base of
the upwards sloping
triangle as a target trade in this situation. As shown by the
purples lines, this usually sets very
low targets. The upwards sloping triangle is important in
this chart pattern as an initiating trigger
for a much larger pattern trade.

Aggressive traders may act in anticipation of the upwards

sloping triangle being
completed, but we prefer to wait until there is a close above
this level. Returns from this style of
trading range between 20% and 35% with around 65%
reliability.
Once the target has been achieved there is no guarantee of a
continuation of the trend.
In some cases prices collapse quickly from these target
levels, and this retreat may offer
another stirrup trade set up.
The stirrup trade with Singapore listed Nera Telecom
illustrates this type of trade. It
starts with the price retreat from $0.385 to $0.335. The
uptrend has halted, but we do not know if this retreat is
temporary, or part of a longer term downtrend. Prices begin
to rebound from
$0.335. The upward sloping triangle the stirrup in this
context is quickly confirmed by the
way prices hit the resistance level at $0.355. There is no rush
in identifying this pattern as there
are no sound advantages in entering the pattern early. We
can try to anticipate the development
of the pattern, and use the base of the trend line as a stop
loss point. However, if prices
collapse below this up trend line at the bottom of the triangle
they can fall very rapidly. It is safer
to wait until the high probability trade pattern is confirmed.

After six days of persistent rises to the resistance level, Nera

Telecom finally breaks
above. This is also in the last third of the triangle pattern.
This confirms the stirrup, and we plot
the measurement lines from the low at $0.335 and the high at
$0.385. These are then projected
upwards to set a target at $0.435. A trade entry at $0.335 is
available on each of the following
two days.

Nera Telecom is a very fast moving stirrup rebound. It takes

six days to reach the stirrup
target price. This fast moving trend lifts prices above the
target level, but it also collapses
quickly. Traders have six days where it is possible to exit at
their target price. This trade returns
around 24%.

The stirrup pattern is based on a relatively small and

unimportant upwards sloping
triangle. What makes it significant is where it occurs in the
context of a retreat and rebound
environment. The stirrup pattern gives the trader a leg-up
into a higher probability trend
continuation. This is a useful pattern that provides reliable
signals in a situation where many
other techniques are less useful. The stirrup pattern signals a
resumption of the pre-existing
trend. It is a continuation pattern, but it has the advantage
of setting target highs. This makes it
useful in establishing the risk and reward relationship in the
proposed trade. The trade has
around 65% reliability, with typical returns between 20%
and 30%.

Once the target has been achieved there is no guarantee of a

continuation of the trend.
In some cases prices collapse quickly from these target
levels, and this retreat may offer
another stirrup trade set up.
SUBJECT SUMMARY
STIRRUP PATTERN
The stirrup pattern boosts the trader into a higher
probability trend continuation after a major priceretreat.
We call them a stirrup pattern because like a stirrup on a
saddle, they hang in mid air and helpboost the rider into a
higher seat. The pattern starts with a small upwards sloping
triangle that forms atthe bottom of a price retreat after a
major uptrend. This triangle triggers a broader pattern
development.

The stirrup pattern measures the distance between the

previous trend high and the retreat low.
This distance is then projected above the top of the trend
high and sets a new target for the reboundbreakout. The
stirrup pattern signals a resumption of the pre-existing
trend. It is a continuation pattern, but it has the advantage
of setting target highs. This makes it useful in establishing
the risk and reward relationship in the proposed trade. The
trade has around 65% reliability, with typical returns
between 20% and 30%.

From: vimal raj at 09:30 AM - Oct 02, 2012( 11 months ago )