Dragon pattern

Discussion in 'Technical Analysis' started by Pekelo, Feb 18, 2009.

  1. Pekelo


    By popular demand I explain in this thread the dragon pattern with examples. If you still have questions (although you shouldn't :) ) just ask.

    Q: What is the dragon pattern?
    A: It is a failed double bottom pattern, where a failure occurs around the half of the W's height after the 2nd bottom and falls lower making a 3rd bottom, where it bounces.

    Q: Why is it called a dragon?
    A: Because according my vivid imagination, it reminds me of a dragon. See the picture below. If it bothers you, you can call it "The Pekelo".

    Q: Could you explain it more?
    A: Here are the definitions, a W refers to a double bottom, because it looks like one.

    Height: The price distance between the 1st bottom and the middle of the W.

    Failure: The point after the 2nd bottom where the rally stop advancing and starts to fail. Usually happens around half of the Height counted from the 2nd bottom, quite often at the SMA line.

    3rd bottom: The price drop from the Failure point is app. the same as the Height.

    Q: What timeframe do you use it with?
    A: Pretty much with any. I will show examples of 5 mins, daily and weekly.

    Q: So how do you use it?
    A: Once a double bottom happens, you have to be aware that it might fail. So assuming you are long from the 2nd bottom, you are watching what happens at the half of the Height, and if a failure occurs, you switch to shorts. Then you do the quick math and you will have a 3rd bottom expectation where you switch back to long for a bounce.

    Q: How big a bounce?
    A: No way to tell. It can be just a few points or it can signal the bottom of a downtrend, just like it did last year.

    Q: Double bottoms-double tops. Does it have a reverse version?
    A: Yes, I call it upside down dragon.

    Q: What is it?
    A: An upside down dragon is a failed double top (M) pattern where after the 2nd top a failure occurs in the downmove and a 3rd higher, very shortable top occurs.

    Q: Is there any difference between between these dragons?
    A: The only thing is with the math, it tends to move only 80% of the Height from the point of Failure.

    Q: OK, can you post a chart?
    A: Sure....


    Here is the current daily chart. The Height was 60+ points (distance between 1st bottom and middle of W), and this is exactly how much we dropped from the point of Failure at 840 (also at the SMA) to the 3rd bottom. From there we bounced so far 9 points. Again, the size of the bounce can be anything....

    Here is the dragon visualization:


    And here is an upside down dragon:


    Note here that the distance from the Failure to the 3rd top is about 80% of the Height...
  2. Pekelo


    Here is how I predicted last year's bottom, posted on 11/14:

    It took 4 days to get there and we slightly overshot it, but it was a damn classic example of the dragon pattern...

    Obviously, when the pattern occurs on a bigger timeframe, one has more time to act on it and the possible reward is bigger.

    Here is an example on the 5 mins chart, the Height is 8 pts and the 3rd bottom went a bit lower from the Failure, 10 points before bouncing:

  3. The pattern you dubbed "Dragon" is what I would call a failed Dragon.

    The dragon pattern I am familiar with is a successful double bottom (or top for inverse dragon).

    The target of the pattern is the "head" of the dragon.

    To me, your pattern is a great way to trade a "dragon failure".

    Thanks for sharing,

  4. Pekelo


    Yes, that looks like a basic double bottom. Lately I haven't seen any of those specially not with such a long neck.

    I assume in a bearmarket my dragon pattern occurs quite often, nowadays I see it about twice a week at least. Here is one from yesterday, it was harder to see because of the choppiness, but still the math applied perfectly.


    The Height was 9 points, the Failure occured 4 pts from the 2nd bottom (half of the Height). The 3rd bottom came as it should 9 pts from the Failure although there was another quite decent bounce 7 pts from the Failure...
  5. I am waiting for the head...so then it should sell off?

  6. Pekelo


    Sure enough, here is the next day's pattern, it even made a nice head (although more of a terrier's head) at the end of the rally.

    The usual math was a bit off, but nothing is perfect. This is the Dow chart, because this shows it the best.

    Height is : 100 pts
    Failure: 75 pts from 2nd bottom
    3rd bottom: 120 pts from Failure

    As I mentioned, we can't tell just what kind of bounce we are going to get after the 3rd bottom, and this time it was the LOD, resulting in a 200 pts rally:

  7. Great setup. Thank you for sharing.

    What type of signal might convince you of the turn (failure of double bottom) ?

    As I recall, you are fond of Williams %R?

  8. Pekelo


    The Williams doesn't signal this type of failure. No indicator that I know of works showing that a failure would happen, but there are 2 ways helping to react:

    1. Math. The Failure occurs around half of the Height, and since you know the Height already, you just have to watch that price range and if a reversal happens, you switch to short. In this last example the Height was 100 pts and the Failure at 70, so it was a bit off, but there was plenty of time to get a ride to down.

    2. SMA bounce. Quite often the Failure occurs just below the SMA 9 line. Best example is the very first chart in this thread. Occasionally the price does go through the SMA but as long as the candle doesn't close above it, you still have a chance for a Failure.

    Also if it didn't bounce back from the SMA but went through, like yesterday, crossing back below the SMA would indicate that a Failure has just happened...
  9. Pekelo


    As I mentioned this works in any timeframe, and bigger the timeframe, more profit you can get and more time you have to react to the failure.

    Here is the WEEKLY chart between last February and mid-September. A giant dragon pattern formed, the Height was 180 ES points, and from the failure, we promptly fell 170 points.

    The failure was at 110 points from the 2nd bottom, a bit off of the expected 90...

    The bounce was a powerful 120 points rally before the SMA stopped that upmove. In the last candle we went down and back in one week 120 pts. Crazy times....

  10. thanks Pek for the detailed explanation. apparently, there is a wide variety of interpretations on the "dragon".

    appreciate your work here.

    #10     Feb 22, 2009