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The Transformers

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In 1983, many parents spent December weekends hunting down the popular Transformers toys by Hasbro. Hasbro still produces the line, popular now with collectors as well as the primary audience. Disgruntled traders hope that the transformers being produced by our markets lately don't prove as long lasting.

Anyone watching charts unfold lately has noticed an unfortunate tendency for one formation to morph into another. An example was found on the SOX's 15-minute chart week before last.

Annotated 30-Minute Chart of the SOX:

Annotated 30-Minute Chart of the SOX:

Annotated 30-Minute Chart of the SOX:

Oscillators provided no clarity. MACD flat lined, RSI squiggled near the neutral level and stochastics chopped in a tight range. What was a trader to anticipate?

The trader should not anticipate. That's the point. When formations morph as this one did, with alternative bullish and bearish connotations, traders are witnessing an ongoing battle between bears and bulls, between supply and demand. Bears appeared to have the upper hand, supply overcoming demand, but enough demand remained to keep prices above converging support. Traders received a warning not to step in too soon on the bearish side.

Annotated 30-Minute Chart of the SOX:

The SOX wasn't the only index with one shape morphing into
another on that opex Friday. The TRAN's formation also morphed, but its eventual breakdown was to show that when formations morph, it's not always easy to determine where the most important
trendlines lie. This is particularly true with formations that broaden.

Annotated 5-Minute Chart of the TRAN:

Annotated 5-Minute Chart of the TRAN:

Annotated 5-Minute Chart of the TRAN:

Last week, the TRAN was to again morph one potential formation into another.

Annotated 30-minute chart of the TRAN:

Annotated 30-Minute Chart of the TRAN:

Formations can morph, and such transformations often warn of warring bullish and bearish forces. No trader can be sure that any formation will confirm as expected, but such morphing activity urges even more caution about forming too strong an opinion of the next move. Don't abandon your study of chart formations and their predicted resolution, but wait for confirmation before you act on those predicted resolutions. When transformers stalk the charts, there's danger in the air.
 

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