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Friday, March 3, 2017

Snapchat, the pump 'n dump markets, & advanced charting techniques

SnapChat and the pump 'n dump markets 

Thursday's Snapchat IPO is the perfect example the pump and dump markets, and there's a lot to be gained  - technically speaking - by reviewing the price action. 

Whether Snapchat has any real value, or not, is debatable, but the typical media hype, of the first tech IPO of 2017, is self evident, so when Snapchat gapped up above it's $17 IPO price it was no surprise.  

The launch: 

In the first minutes of trading, the stock gaps up to over-bought. Again no surprise.

First instinct is to take profits. Some call this the "weak hands", selling. I call it, "predictable human behavior", and this is where I placed my down arrow.

Before I even had a chance to post the chart, we saw the reversal.

The Pullback:

Within only a few minutes it became obvious that Snapchat was, "trying to build a base". 

I already knew that this was probably going to trade into a triangle, as this is usually the case with overly hyped IPO's. I've seen this game before, and it never ends well, for the retail investor, although the ending triangle I was anticipating, turned out to be something else entirely.

The Friday reversal: 

I missed the reversal in $SNAP, because I wasn't watching.... Really, I could care less about the Snapchat IPO. I mostly chart for the fun of it, and the learning experience, and retirement planning.  

When the price action fell out of the triangle, in blue, that was your cue to sell, but as it turned out, all we got was a pullback. I truly believed Snapchat was going to continue to pullback in a powerful wave "C".  I was wrong, and that was made obvious at Friday's open, when the stock broke to new highs.

So what was this pullback. You could say it was a truncated wave "C", although that doesn't fly.
Monday morning quarterbacking, it looks like consolidation in a down-turned wedge, in what I believe is most likely wave 4. Elliot Wave theory is up to individual interpretation. Granted this is a 2 min chart, with no history, but it's a good example of what can happen when you only have one pre-conceived outcome in your mind.

$SNAP - here's the revised chart. Looks like it's consolidating in wave iv of 5, which just happens to be where I believe the broader market is. Also resembles a down-turned wedge (consolidation in another bullish down-turned triangle).  

The Fake News:

Of course, this morning, CNBC couldn't wait to report that Snapchat is up 44%, and that it looks like "the investment banks are out of the woods"? Funny, I never knew the investment banks were in the woods, but I guess the truth always comes out sooner or later. They immediately followed that story, by bashing Trump's attorney general, and that's where I delete the DVR recording. Truthfully, I only watch the first few minutes of CNBC's Worldwide Exchange to get a read on what the enemy is doing. Real traders watch Bloomberg.

As an aside: You need to check out this video, to learn what the powers that be are planning. As I've been saying all along, they're going to blame the Trump administration for the global collapse.

 Identifying different types of triangles: 

The reason I don't cover triangles, in my free EW tutorial, is that it's a confusing topic. I could spend as much time on triangle patterns, as I spent on the entire tutorial! 

False Triangles: 

  1. First off - All triangular shaped patterns are not actually true triangle patterns at all. Many times you hear these referred to as, a "continuation pattern", but that pattern is more of a breakout above support, than out of the top of a triangle pattern. May looks like a triangle, but it never hesitates, only breaks out of down, and that's a key to identifying the wave count.   When you see a triangle being drawn, and someone calling it a continuation pattern, that's more indicative of a breakout in a continuing trend. Took me a while to grasp this concept, so if you don't get it, put it on the back burner. 
  2. I often see chartist draw triangles where there is none. This comes down to drawing triangle boundaries correctly, but I don't have time to delve into that process this morning. 
  3. Other times we identify what looks like a triangle, and proves to be something all together different. 
True Triangle patterns: 
1. The 1st type of triangle pattern I'd like to focus on is called a, "leading diagonal triangle pattern". I provide a couple examples of this type of triangle in my free EW tutorial (linked in the side menu). These patterns are seen in bull markets, and bear markets. US Steel is a good example of a bullish leading diagonal triangle (broadening). I won't get too much into the internal structure, but the subdivided waves - within the pattern - often overlap, and that's allowed under Elliott Wave rules and guidelines. One this type of pattern completes, you get a pullback, into either wave 1, or wave B.       

2. The ending diagonal triangle pattern, marks a capitulation top, and is followed by a major reversal. These types of patterns occur in wave 5 at the end of a trend.
Some time these can take a very long time to complete.

Here's a good example of what looks like an extended super bearish ending diagonal triangle in a toxic debt fund. You can find this chart among my public charts.
$TRAN - another ending triangle pattern in an extended wave 5.

The 2 examples of triangle patterns above shouldn't be confused with the consolidation that occurs in another type of triangle pattern - most often seen in wave 4, or wave B. See the previous update for a classic sideways wave 4 triangle (consolidation) in a treasuries. To make things more confusing these consolidation patterns don't always trade sideways. They can be ascending, or declining, broadening, or contracting.

$GDX Gold miners is a good example of what looks like a broadening, and ascending, triangle (consolidation) pattern to me. Am I right? I still can't say. If support at my revised purple line breaks, that becomes resistance. I don't always have the answers. These types of patterns are difficult to identify, and predict. Another thing to note is that wave E is unpredictable, it may throw-over (past the target), or fall short of the target, but seldom does it take out the final target precisely.  


I hope that gives you a little better understanding of triangle patterns, and how to make sense of them.


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