Trading with Arc Pattern Trend Lines

11/07/2011 2:35 pm EST

Focus: STRATEGIES

Corey Rosenbloom

Founder and President, Afraid to Trade

Arc pattern trend lines can be very useful for identifying support and resistance levels and spotting reliable trade set-ups, says Corey Rosenbloom, especially when using multiple time frames.

There are lots of technical analysis tools that you can use. One of them is called an arc pattern. Our guest today, Corey Rosenbloom, likes to look at those, and he’s going to talk about how he uses them. So Corey, first of all, what is an arc pattern?

The arc pattern is really just a trend line, sort of a modification. Most people look at horizontal or slanted trend lines; they’re connecting price lows and price highs. That’s the most common.

What tends to work well also is to have an arc to adjust that trend line to curve with the prices themselves because it’s an issue of supply and demand.

When buyers take over more pressure, the price will go higher, or for sellers it goes down. What most people look for in trend lines is that kind of support or resistance, but an arc trend line just shows the confluence or the flow of supply and demand in a more gentle method. Not so much in a horizontal or linear fashion; it’s more curvilinear.

So what do we expect this to do? If we see a nice arc forming that’s starting to turn over where the top of the arc is starting to turn down, does that mean it’s going to continue down?

Generally, yes. That’s what happens with supply and demand.

So in the beginning of a move, let’s say a trend move begins, and it’s a fresh trend, it’s powerful, the momentum is strong at the beginning, volume is picking up. That has greater odds of continuity.

As it continues, if there is no climax or a major exhaustion, a euphoric burst or anything like that, it’s rather a gentle rollover or transition from the (in this case) demand from buyers to sellers.

Yes, that would show divergences in momentum, divergences in volume, and it would forecast the loss of momentum; a rollover or dominance by the sellers. Thus the arc should continue when seen in real time.

Is it almost like a Bollinger band where I’m trading between the two, the top of the arc and the bottom of the arc?

A little bit, but it’s more in terms of pattern. It’s not so much an indicator to look at, it’s price. We’re looking just at price.

The other indicators are confirmation and non-confirmation, but it’s really seen easily in price. It’s also called a scalloped pattern; cup and handle pattern is another term for it, but it’s the same principle. Whatever terminology we use for it, it’s a gentle transition from demand to supply or from supply to demand.

All right, I know that you like to use multiple time frames. So if you see the arc on a longer time frame, but you’re more of an intraday trader or short-term trader, how would you combine the two things?

Exactly. We’ve seen a lot of times in the S&P or gold, and actually I’ve been looking at an arc in the hourly chart in gold. That translates to the lower frames.

So let’s say a daytrader is looking to trade gold with the higher time frame, the daily chart or the hourly chart arc, that’s a gentle transfer of supply and demand. It’s not 100%, of course—nothing is—but it’s a predictable pathway.

So the intraday trader can look at this and see if there are other kinds of signals on the intraday time frame, five- or one-minute for scalping; that can be done. Take in this case if it’s a rollover to the downside, short positions in the context of that higher-time-frame pattern.

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