The modern world has seen plenty of disruptions in its path of modernization. Disruptive innovations are necessary along with new technologies and new entrants to provide faster and more efficient technologies, methods and services going forward. The past disruptive technologies include the Sony Walkman, Minicomputers, increased computer storage, iPods, the Kindle, the iPhone and much more. The world should look at these disruptive technologies as a positive force to make products and services easily accessible and affordable for the masses.
Amazon (AMZN) has been at the forefront of disruptive technologies since 1999, as it is changing how people interact, eat, work, shop, dress and travel. Amazon’s big attraction for consumers is its low prices with free shipping. Amazon achieves this ultra edge of affordable low price and convenience through high-tech innovations, superior supply-chain management and its fulfillment network. A secular shift in consumer behavior with Amazon’s technological innovative ideas has given Amazon a stronghold in e-Commerce and retail sectors. Their recent acquisition of Whole Foods Market (WFM) is an example of grocery disruption. But it has also created major disruptions in the cloud services, retail and transportation sectors.
In 2013, Amazon’s CEO Jeff Bezos introduced the world to its futuristic delivery plan of using drones. With drones and self-driving trucks, disruption is headed for transportation. Amazon is preparing its transportation disruption using cutting-edge technologies, innovative logistics and massive fulfillment networks.
Technology disruptions affect industries across all sectors. Drones and self-driving trucks will affect the transportation sector along with the trucking, insurance, construction, auto parts and hotel sectors. The Dow Jones Transportation Average (DJTA), also known as the Dow Jones Transports, is made up of airlines, railroads and trucking companies. The DJTA is the oldest U.S. stock index, compiled by Charles Dow, co-founder of Dow Jones & Company, and dates back before the Dow Jones Industrial Average. This index consists of airlines, railroads, trucking; and delivery services and marine transportation stocks (see “Team Transpoports,” above).
Here, we will present a five-point Harmonic pattern formation (Bearish Shark) in the DJTA ($TRAN) and how to trade it.
5-Point Harmonic Patterns
The foundation and trading concepts of Harmonic patterns were introduced by H.M. Gartley in 1932. Gartley wrote about a five-point pattern (known as Gartley) in his book, Profits in the Stock Market. Few other authors have worked on this pattern theory. The best works have come from Scott Carney in his books on Harmonic Trading. Carney also discovered patterns: Crab, Bat, Shark and 5-0; and added depth of knowledge with Fibonacci ratios and established trading rules to improve risk and money management. His pioneering work is impressive, and has opened newer trading styles and careers for many traders.
The primary theory behind Harmonic patterns is price/time movements, which adhere to Fibonacci ratio relationships and its symmetry in markets. Fibonacci ratio analysis works well with any markets and on any time frame. The basic idea of using these ratios is to identify key turning points, retracements and extensions along with a series of market swings. The derived projections and retracements using these swing points will give key price levels for price targets or stops.
Harmonic pattern identification can be a bit hard with the naked eye, but once a trader understands the pattern structure, it can be relatively easily spotted by Fibonacci tools. The primary harmonic patterns have five-points: Gartley, Butterfly, Crab, Bat, Shark and Cypher patterns. These patterns have embedded three-point (ABC) patterns and four-point (ABCD) patterns. All the price swings between these points are inter-
related and have harmonic ratios based on Fibonacci. Patterns are either forming or completed “M” or “W-shaped” structures, or combinations of “M” and “W” in the case of three-drives. Harmonic patterns (five-points) have a critical origin (X) followed by an impulse wave (XA) followed by a corrective wave to form the “EYE” at (B), completing the AB leg (see “Gartley bulls & bears,” below).
Then, this is followed by a trend wave (BC) and finally completed by a corrective leg (CD). The critical harmonic ratios between these legs determine whether a pattern is a retracement based or extension based pattern and defines its names: Gartley, Butterfly, Crab, Bat, Shark and Cypher. One of the significant points to remember is that all five-point and four-point harmonic patterns have embedded ABC (three-point) patterns.
All five-point harmonic patterns have similar principles and structures, and they differ by their ratios to identify them and locations of key nodes: X, A, B, C, D; but once one of the patterns is understood, it may be relatively easy to grasp knowledge of others. It may be helpful for traders to use an automated pattern recognition software to identify these patterns rather than relying on the naked eye, which could produce false positive signals.
Trade Entries and Stops
The most effective trades in these five-point patterns are reversal price-action ones combined with a reversal trend change from the reversal zones at point “D.” It could be a bullish pattern or a bearish pattern. Usually, “D” is identified by a confluence of projections, retracements and extensions of prior swings (legs), universally called a reversal zone. The entry criteria and pattern validity are determined by various other factors like volatility, underlying trend, volume structure within the pattern and market internals. If the pattern is valid and the underlying trend and market internals agree with the harmonic pattern reversal, then entry levels (EL) can be calculated using price-ranges, volatility or some combination. Stops are placed above/below the last significant pivot (in five- and four-point patterns it is below D for the bullish pattern, above D for bearish patterns).
Target zones in harmonic patterns are computed based on the retracement, extensions or projections of impulse corrective swings and Fibonacci ratios from the action point of the pattern structure. For example, in Gartley’s bullish pattern, the target zones are computed using XA leg from the trade action point D. The projections are computed using Fibonacci ratios like 62%, 78.6% of XA leg and added to the action point (D). The extension ratios—1, 1.27, 1.62, 2, 2.27, 2.62—are computed for potential target levels. The primary target zones are marked computed from D as 62% to 78.6% of the XA leg (or largest of XA and CD) as the first target zone and 127% to 162% as the second target zone.
Target Zone1: (D + XA*0.62) to (D+XA*.786)
Target Zone2: (D + XA*1.27) to (D+XA*1.62)
The following example shows an auto-generated Bearish Shark (five-point) pattern formation in the DJTA (see “Transport short,” below).
After a steep rise in $TRAN from January 2016 to June 2017, prices may have formed a top as it builds a Bearish Shark pattern. The Bearish Shark pattern is a variation of the Gartley pattern with different retracement and extension ratios. A Bearish Shark pattern formed after extending beyond both point X and point A. Point “B” also formed at a critical 61.8% XA level.
How to it trade it.
1. A potential completion zone is formed in a cluster around 9600 to 9800. This indicates a Bearish Shark pattern is complete with an entry level (EL) below 9661.
2. On July 18, 2017, $TRAN closed below the entry level (EL) to trigger a short trade at 9661.
3. A stop is placed above point D at 9763.
4. The first target zone is set at 8962-9133. The second target zone is set at 8112-8469.