This weekend was a perfect sunny day. I woke up late in the morning and was breakfast at my local diner, when my phone rings.
It was Bob.
Bob: Hello Sanjoy! Would you like to go to Master Wong's place?
Sanjoy: Sure! Get your car and meet me at front of my house.
At Master Wong's place, the assistant led us to his living room.
Master Wong was seated on the floor. Another gentleman was with him. He was short, plump and had a jolly smiling face.
They was watching the full wall high definition television. A sumo wrestling match was in progress in the television.
Master Wong: Hi Bob, Sanjoy. Meet my friend, Mr. Lee. He is a marketing vice president in Japan. He just came last night at 1:00 AM. Bruce, was it 1:00 AM or 2:00 AM?
Bob: Hello! Nice meeting you. Your first name is Bruce? Like Bruce Lee the Karate expert?
Bruce Lee: Oh my!! You are the millionth person to tell me that. Yes! That is my real name. Serious! After Bruce Lee became famous, all the bullies in my school used to beat me up just to boast that they have beaten up Bruce Lee.
Sanjoy: Which company do you work for?
Bruce Lee: You see that Sumo wrestling going on television. I market Sumo wrestling events. I go to big companies and market these events and get them to sponsor these events. Sumo wrestlers are big celebrities in Japan, just like base ball players or boxers here.
Master Wong: Lee, at present, I am teaching Bob how to trade. Just a few weeks ago, I taught him the "FIGHT UNTIL DEATH" technique.
Bob, can you describe this technique?
Bob: Sure. Here, the bulls and bears fight among themselves. Both get weaker and weaker, but they refuse to give up. We can see that the chart makes a triangular pattern. In the end, one of them concedes defeat, so either the stock breaks out on the upper side or breaks down.
[IMAGE 1]
Master Wong: Correct, and because the bulls and the bears get weaker and weaker, and you can see the chart goes on tapering in a triangular pattern.
Sometimes, the bulls and bears still maintain their strength instead of getting weaker and weaker. If they both fight and struggle but maintain their strength, the stock chart does not taper off into a triangle pattern. It forms a rectangular channel pattern.
[IMAGE 2]
Master Wong: Now, let me teach you another pattern. Imagine that there is a boxing match between Mohammad Ali and Mike Tyson.
Bruce Lee: Oh! Master Wong! They were both great boxers but they were in different eras.
Master Wong: Oh yes, I know that. Just imagine that both are young and are in the boxing ring. Who would win?
Bruce Lee: It will be difficult to say. Ali was the greatest boxer of his time. Tyson was also good when he was in his peak state.
Bob: I still think that Ali would defeat Tyson.
Master Wong: OK!, Let us assume that Ali manages to hit Tyson two three times. Now, Tyson is running away from Ali in the ring. Can you imagine this? Tyson is feeling that he is about to get defeated. Then, Tyson makes a gesture and two of his friends from the crowd get into the ring to help him.
Sanjoy: Hey! That is not fair! You can not call your friends to help you in the ring.
Master Wong: Let us imagine that you can call your friends to help you. Now, Tyson and his two friends proceed to hit Ali. Now, it is Ali's turn to be afraid. He tried to run away from Tyson and his two friends. Then, Ali calls his friends for help. Three friends of Ali jump into the ring. Now, Tyson and his group is outnumbered. Ali and his friends proceed to beat up Tyson and his two friends.
Bob: Now, Ali and his group is winning.
Master Wong: The story is not over yet. Tyson calls four more of his supporters for help. They jump into the boxing ring and start beating Ali and his three friends.
Bob: This is going nowhere. It will be so difficult to predict who will win this funny match. In the end, the person who can get the maximum number of supporters will win. But, we can not predict who has the maximum number of supporters.
Master Wong: EXACTLY! This is what I wanted to hear from you. I will show you a stock chart pattern where this scenario happens.
Master Wong motioned his assistant to bring the drawing board and drew the following.
[IMAGE 3]
Master Wong: See the chart here. As the stock goes up, the bears who are getting defeated panicked and called for other bears to support them. As more bears jump into the battle, the stock dives down and the bulls take a beating.
But, then the bulls call other bulls for help and more bulls jump into the battle and the stock then jumps up till the bears and their buddies overpower the bulls again.
Bob: Hey! This shape just looks like a microphone. This is so confusing. I do not know whether to buy or sell. If I buy then if the bears call more of their friends, the stock will go down and suffer loss.
If I sell and the bulls call their friends for help and the stock moves up, I will again suffer a loss.
Master Wong: Yes! Absolutely correct. So, here is the rule. If you see this MICROPHONE pattern or a broadening triangle pattern, just stay away from it, because you never know which side would win.
Sanjoy: Master Wong, is there no way you can trade this?
Master Wong: Heeh, Heeh Heeh!! There are ways to trade this, but I wanted you to understand the background of how this pattern is formed. Once you master the basics then we will go to advanced concepts. Bob, did you understand how this pattern is formed?
Bob: Yes, I understood this pattern perfectly and I can recognize this pattern in a stock chart. It will be shaped like a microphone or a broadening triangle.
Master Wong: Perferct. Here is how to trade this.See the following figure. Here, the bulls called their friends for help and the prices started to go up. Suddenly, the prices just turned around and then started to go down again.
Bob: Uh Oh!! This is a bad sign.. The bulls, even with help of their friends could not go up. The bears will surely defeat them this time.
Master Wong: Correct. You can just short the stock when it starts going down and place stop loss at the peak formed. Did you understand this?
[IMAGE 4]
Bob: Yes, I understood it.
Master Wong: Now, look t this figure. The stock had gone up, when the bears and their friends returned to push the stock down. However, suddenly, the stock turns around and goes up. Now, this is a bullish sign. The bulls have defeated the bears and their buddies.
Bob: If I may say so, you should buy the stock when it turns around like this and place the stop order at the point shown. Am I correct?
Master Wong: Absolutely! You got the idea. Mr. Lee, how do you like our training session.
Bruce Lee: Wonderful. Very educative. I wish I could also trade, but I am traveling all around the world. Most of the time, I am on the place. So, I do not have time to check the stocks daily.
Master Wong: Lee, These stock patterns which I teach work on all time frames, since they re based on the behavior of the crowds. So, you should try trading using a weekly or a monthly time frame. Then, you can just go over your charts every week end instead of every day.
Bruce Lee: Aaah haah!! That sounds like a good idea.
[IMAGE 5]
Master Wong: Bob, here is your next assignment for the week. Go through all the charts in your watchlist and search for this microphone shaped pattern.
See if you had a trading opportunity or not. Most of the time, you would not be able to buy or short. But if there is a failure of the bulls or bears, then you can trade.
