The Craft of Tape Reading, Part I: The “Whoosh” Pattern

This post was contributed by a guest author, and does not necessarily reflect the views of Richard or MovetheMarkets.com

As a part of my never-ending quest to improve my competency as a trader, I recently turned my attention to the craft of tape reading. Unlike a search on chart patterns or technical analysis, a search on Tape Reading in Amazon will yield only a scarce few relevant results. The topic of tape reading has very little coverage in the trading community, and if I had to guess at the reason for that, it could be because Tape Reading is even more so an art than chart reading. With chart analysis, you could theoretically write down a method and use it to develop an automated trading system, but no one has been able to automate tape reading techniques.

But just because tape reading is more discretionary does not invalidate its merits as a tool.

In my search (aka googling) to learn more about tape reading, I came across an article on this mysterious lost art, written by one of the (new) Market Wizards, Linda Bradford Raschke (LBR). In her article, LBR espouses tape reading as a means of anticipating trade entries and exits, and also to filter out “false” trade signals. This is appealing to me because no matter what technical indicator I use (PMA crossovers, stochastics, ADX, MACD, etc.), all signals based on such indicators will be delayed.

There are three main points to this article:

1. Use a meaningful reference point (such as previous day Hi/Lo, Pivot Points, S/R levels from the daily chart, etc.) to measure magnitude and direction of price action.

2. Monitor the market’s response to a particular condition in order to gauge the strength or weakness of the market.

3. Think in terms of levels. For the eMini S&P 500 futures, a level would be a round number like 1560.

Cool.
As I read through this article, one of the points that I had trouble understanding was the concept of a “whoosh.” I mean, as a student of the scientific method, I just didn’t find “Whoosh” to be a very precise description. LBR describes a “whoosh” as any impulsive price action when the market is near an important reference point. That was a very technical definition which I wasn’t able to internalize until today. In this WallStreak post, I wrote about what I thought might happen as the e-Mini S&P Futures (ES) approached a seemingly meaningless reference point. Then here, I called what I thought would be a double bottom and which would imply support for a move back up to prior resistance levels. Up to that point, the tape was moving slow, and not too many big players (ie. +100 contract size trades) were participating in the 2pt drift upwards from 1564 to 1566. Because the tape was sluggish at 1565, and we had just bounced up from 1563.50, I thought we would be entering a trading range (from 1563.50 to 1565). What happened next really caught me by surprise. The volume tracker started beeping and beeping, as sellers started appearing in droves. In exactly 62 seconds, the price dropped 4 ticks, which is significant, because it had been doing very little prior to that move. The volume tracker also showed that buyers were retreating as the sellers started coming in, since at 10.07:37, there were 500 shares traded at the ask, but the bid/ask still dropped. So, you actually have two components of a “Whoosh”: buyers are retreating (ie. number of bids at a given price level are decreasing), and sellers are increasing (ie. expansion of ask at a given price level). This phenomenon can be seen more easily when watching instruments that are more thinly traded (like Silver futures, or GROW pre-split).

The following characteristics can be inferred from the above picture:

1) Range expansion of the NYSE A/D

2) TICK extreme in the direction of the impulse price action.

3) buyers disappearing

4) Sellers increasing

6) Volume expansion thru the reference point

I don’t know if these characteristics are typical of a “Whoosh.” If I had to guess, I would say that the one about buyers disappearing and sellers increasing might be a common characteristic. But it is certainly worthwhile (for me) to continue studying it.

As it turns out, the whoosh pattern, as I see it, is just another variation of the classical breakout pattern. Nonetheless, it is still a powerful pattern. That’s because once you have correctly identified the “Whoosh” pattern, you have pretty much identified what the herd is doing, so entering in the direction of the whoosh is almost certainly a low risk, high probability trade (within a reasonable time window of opportunity). And that is what I always want, uncovering those low risk AND high probability trades.

The only problem is that this “Whoosh” pattern doesn’t occur consistently, nor does it follow any chart pattern that I know of. There are no technical indicators, nor rules that I know of which tells of an impending “Whoosh” that is likely to happen. A “Whoosh” may or may not happen at an important reference point, there’s just no way of knowing beforehand. I guess what I’m trying to say is that the “Whoosh” pattern can only be identified in real-time by watching the tape.

Ok, so that’s what I got out of this article. As I come across more interesting “stuff” on tape reading, I will share them with everyone.

This post was contributed by a guest author, and does not necessarily reflect the views of Richard or MovetheMarkets.com