Three PushesBy on 2011 Apr 9 Sat 16:39:00
Part of Art of Chart Reading
Three Pushes is one of the more reliable chart patterns that work very well across almost all financial instruments. The pattern is easily recognizable and many of its formations can be computerized, making it one of the favorite price formations used by bots as part of their exit strategies.
Start from an abrupt stop that retraced from the current extreme, pause, push towards the extreme and taking it out quickly. Yet, stop and retrace not too far from the first extreme. Pause and push one more time to take out the second extreme but immediately snap back again.
As long as the second extreme is stopping the price from resuming the move in the current direction, it is likely that you will see the price going back to where the three pushes started.
Here is a classic example of the pattern.
First, notice that you would not be able to tell if you are having a three pushes in the making until after the 3rd push is in progress. At that time, you can figure out the starting point by measuring backward using the 2nd leg as the reference. In general the 3rd leg should never push to 2 times the height of the 1st leg, if so, it is not likely a three pushes pattern.
Second, once the 3rd push is completed a market usually get stuck because, as in this example, all sellers willing to sell at the current price level are exhausted. But most of the buyers are not ready to step in to change the trend yet.
Third, to put the retracement in motion, a rejection of making a 4th leg must happen. As in this example, the down move is broken at the time a 1-2-3 buy happened at 13:15. From that point onward, the likely price target is to tag the start of the three pushes pattern, which is marked by the red horizontal line.
So, a safe play of the pattern is to enter the counter trend long at or after 13:15 1-2-3 buy trigger with a target of the red horizontal line and a stop below that 3rd push extreme.
The more aggressive play, if confirmed by other information like 3rd push is landing onto major support zone, or, some kind of breadth based divergence signal, etc., is to buy the 2nd push extreme price level once the bounce from 3rd extreme has started.
The safe play is purely price pattern with strong bias in favor of the target tagging.
The more aggressive play requires synergy of multiple trading signals or setups to improve the odd of picking a bottom.
When Happening at the End of a Strong Move
When three pushes happen at the end of a rally or selloff, it is a signal of pause, not reversal. Only after the formation is broken would it turn into a fully formed reversal pattern.
This type of three pushes have the extremes more pointy and the pauses taking less time.
Google made such a move back in 2008. Notice the 3rd leg does not have to be completely equal to the 2nd one. It can be shorter, as in this case. The more important aspect is that 3rd leg ends before tagging the 2X range measured from the 1st leg. The target (the red horizontal line) was tagged and marked the start of the continuation selloff.
When Happening within a Retracement Context
When you see a three pushes formation forming within a retracement, the extremes are usually less pointy and the pauses take longer time. These three pushes signals the continuation of the original trend. They are effectively the same as bull or bear flags.
CAT had a prolonged bull run back in 2002 to 2008. The pullback is a perfect example of a three pushes pullback. It also shows another property of the pattern that when a breakout occur, the likely target is 2X the first leg (orange line).
There you go, my first chart pattern explanation from the point of view of a trader, not a chartist talking about charts.