By Stephen Loke
Chart patterns are extremely useful to help us spot important trend changes. I will show you in this article how the Nasdaq etf QQQ was able to help us spot a top in stocks. Those who know how to utilize them will be able to spot things in the market before it happens. Those who learn from history will be able to avoid steep market sell off in the future.
One might wonder whether technical analysis really works or not in the stock market. Some may argue that technicals are a waste of time and do not work. Perhaps that is because they haven't put in the effort that is needed to master it. If you really put in the effort and learn to spot these pattern, you will be able to spot a top most of the time.
In this article, I would like to show you the immense power of utilizing chart patterns and multiple time frame analysis to help you anticipate what might happen in the stock market. Normally, I like to use the futures chart of the Dow, S&P 500 or the Nasdaq 100 to help my readers to understand what is happening. However, I do find value in looking at the etf of these indices. Below, you can see the daily chart of the QQQ which mimics the performance of the Nasdaq 100.
Look at the big plunge that the QQQ experienced. Not only did the tech sector collapsed, the entire market had a huge sell off which we investors had not seen for a long time. Dow's 3000 point plunge in one week shocked many many people and erased billions in gains from investors portfolio.
You might wonder where is the head and shoulders top that I mentioned. Well, all of us should not only look at one timeframe. A dynamic investor or trader should look at the smaller time frames to help him or her spot moves in the bigger time frame.
The chart above is the 60 min chart of QQQ. As you can see, the QQQ flashed warning signals to investors even before the collapse. QQQ formed a head and shoulders pattern. It broke the neckline and a sell off started. For those who are new to technical analysis, the head and shoulders pattern is a bearish reversal pattern that often happens at market tops. This time it did not happen in the daily chart but in the 60 min chart of QQQ.
There are 2 important lessons to take away from this article:
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