SPOT: Three Drives distribution pattern
This monthly perspective chart of Shopify (Shop) illustrates a stock in which supply is gradually overpowering demand.
• Three drives to a high (X1-X3) is a common pattern (and one of my favorites). It often marks the end of a trend.
○ Each successive thrust in the pattern covers less ground. This occurs as sellers (supply) become more willing than buyers (demand).
○ The three drives pattern is fractal, in other words, the pattern can appear in all time frames.
• The Relative Strength Indicator (RSI) developed a series of lower highs, even as price managed a series of higher highs. This momentum divergence confirms that bullish momentum (driven by demand) became less intense on each successive thrust.
• Finally, the MACD is rolling onto a monthly sell as momentum stalls and reverses.
• Now price is pounding/testing the strong support zone derived from internal pivots and the most recent low.
There are other clues that all is not right in SHOP. For instance, large bearish reversal bars at each of the successive highs suggest strong handed willing sellers have been actively distributing supply into each rally. Its likely that the same sellers will continue operating. Its also likely that weak hands who purchased during the distribution phase will be forced to liquidate if the market begins to make progress below the pivot support.
In future posts we will discuss how one might use simple patterns like this to develop trading and risk management plans and how to integrate information from shorter, more tradable time frames into the analysis.
Good Trading:
Stewart Taylor, CMT
Chartered Market Technician
Shared content and posted charts are intended to be used for informational and educational purposes only. The CMT Association does not offer, and this information shall not be understood or construed as, financial advice or investment recommendations. The information provided is not a substitute for advice from an investment professional. The CMT Association does not accept liability for any financial loss or damage our audience may incur.
• Three drives to a high (X1-X3) is a common pattern (and one of my favorites). It often marks the end of a trend.
○ Each successive thrust in the pattern covers less ground. This occurs as sellers (supply) become more willing than buyers (demand).
○ The three drives pattern is fractal, in other words, the pattern can appear in all time frames.
• The Relative Strength Indicator (RSI) developed a series of lower highs, even as price managed a series of higher highs. This momentum divergence confirms that bullish momentum (driven by demand) became less intense on each successive thrust.
• Finally, the MACD is rolling onto a monthly sell as momentum stalls and reverses.
• Now price is pounding/testing the strong support zone derived from internal pivots and the most recent low.
There are other clues that all is not right in SHOP. For instance, large bearish reversal bars at each of the successive highs suggest strong handed willing sellers have been actively distributing supply into each rally. Its likely that the same sellers will continue operating. Its also likely that weak hands who purchased during the distribution phase will be forced to liquidate if the market begins to make progress below the pivot support.
In future posts we will discuss how one might use simple patterns like this to develop trading and risk management plans and how to integrate information from shorter, more tradable time frames into the analysis.
Good Trading:
Stewart Taylor, CMT
Chartered Market Technician
Shared content and posted charts are intended to be used for informational and educational purposes only. The CMT Association does not offer, and this information shall not be understood or construed as, financial advice or investment recommendations. The information provided is not a substitute for advice from an investment professional. The CMT Association does not accept liability for any financial loss or damage our audience may incur.
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