Combined with P3 Pattern, You Trade Both Sides of the Market

P3 /2:
1
Combined with P3 Pattern,
You Trade Both Sides
of the Market
by
Wendy Kirkland
Meet the Author
H
Wendy Kirkland
ow did an award-winning artist and sculptor, who owns an
eclectic gift shop in Historic Biltmore Village, end up an
option guru? Let’s see…
• The need to take immediate control of her financial future brought
Wendy to option trading and the leverage it offers.
• Inspired to help other women enjoy the financial security she had
found, Wendy launched WomenOptionTraders.com and began
giving online classes. “As I teach other women to successfully
trade options, I become a better trader myself”, she said.
• A natural-born teacher, her following grew quickly and so did
requests for an easy-to-understand book on options. So in 2009
Wendy co-authored, with Virginia McCullough, “Option Trading
In Your Spare Time—A Guide to Financial Independence for
Women”.
• Insightful, comprehensive, and easy-to-read, “Option Trading In
Your Spare Time” received rave reviews. And get this: undeterred
by the title and pretty pink cover, more men than women bought
the Guide to Financial Independence for Women, now in its
second printing.
• Then, in 2010 a major uprising… online traders, men and women
alike, heard that Wendy’s P3 System produced nearly 100%
winning trades and they wanted in. With a generous heart Wendy
began publishing a weekly list of stocks which meet the stringent
P3 System criteria. Subscribers unanimously report a higher
percentage of winners, greater monthly income, and a vastly
improved financial outlook thanks to Wendy’s P3 System and
Squeeze Newsletter.
• When TradeWins Publishing heard about Wendy’s miraculous
discovery and tremendous success, they called her right away. The
result is Wendy’s new book, which contains the most important
parts from her “pink book” and a full-disclosure of her P3 System,
in easy-to-follow, step-by-step detail.
• P3: Putting Profit Probability Potential on YOUR Side… this
is your key to financial freedom. So sit back. Put your feet up.
And enjoy your first step on a wonderful adventure.
Copyright © 2014 by Wendy Kirkland All right reserved. No part of this book may be reproduced, scanned or distributed In any printed or electronic form without permission. 2 Table of Contents
Discovery of the P3 1/2 Pattern .........................................................................
4
P3 1/2 Put Squeeze Pattern ................................................................................
5
Option Selection Guideline ................................................................................
20
Trade Strategy ...................................................................................................
20
P3 1/2 Entry Alert and Confirmations ................................................................
27
Well-Rounded Trading Strategy ..........................................................................
32
3 Discovery of the P3 1/2 Pattern
Since 2010 when I wrote about the discovery of the P3 Squeeze pattern and the
strategy to trade it, I have been searching for a pattern that was as clear and visible to
short an equity when it was ready to drop; a time to buy puts.
In 2011, I wrote about the T3 pattern which was a short pattern that used
different indicators to show that a stock was ready to drop. It works well and many
traders use it as a signal to purchase put options, though I have heard it said that it is
not quite as easy to see as the P3 squeeze pattern. It isn't as clear visually and part of
its pattern is based on what is happening in the market as a whole rather than the
movement of an individual stock.
A pattern for the short side of the market remained a mystery until 2013.
The problem I faced was trying to see some clue that an equity was weakening
with the same chart setup as the P3. One day as I was testing other indicators, adding
and removing them after a period of study, I accidently misaligned the ADX that is
usually placed under the PPO and I placed it on top of the PPO.
Actually is was a funny mistake and I had a moment of panic just like I
experienced when I discovered the P3. I made a mistake back then as well and the
squeeze pattern I had notice disappeared in the mix up.
On the most recent occasion, I again flinched as I tried to sort out why the P3
squeeze pattern was absent and much to my surprise the short pattern that had been
so elusive was staring me in the face.
So to see and make use of both the P3 and P3 1/2 squeeze pattern, we are
going to place 2 ADX indicators on the chart; one above and one below the PPO
indicator.
In this publication I am not going to spend time on the P3 Squeeze, nor will I go
into the process of setting up a chart or how to read the indicators. That information is
covered in the P3 book. The only difference in the template and how to read the chart
is that we will have added the second ADX indicator.
That said, I will go into great detail as to how to identify the pattern and the
various stages that it will go through.
This P3 1/2 publication is designed to work hand-in-hand with the P3 Squeeze
pattern and strategy. The P3 1/2 short pattern allows a trader to narrow down the trade
candidates, focusing on a few superior candidates and then ride their price wave up and
down as price rises and then drops back to rest or reset.
4 P3 ½ Put Squeeze Pattern:
For the P3 ½ adapted pattern for Puts, we will be using the PPO indicator and
the ADX that is on top of the PPO.
In some ways, the squeezing portion of the pattern is not quite as obvious as the
P3, but you can train your eyes to pick it out. More obvious is the P3 ½ ’s sweet spot.
During this stage, the equity’s price drop is a certainty.
On HD's chart below, you will see that the ADX line has dropped to come closer
to the high PPO line and they are running parallel to each other. The PPO line is high
because there has been a recent uptrend, yet now because the uptrend is weakening,
the ADX line has dropped as energy comes out of the uptrend.
Under normal day to day trading when the ADX is on top of the PPO, the ADX
and PPO lines mimic each other, they run in tandem, running parallel like wobbly
railroad tracks.
In the chart below, the uptrend weakened to the point that the PPO line crossed
down and over its signal line. At the same time, the –DI of the ADX is beginning to show
strength by heading up to cross over the +DI line.
Before we get into further details of the P3 ½ pattern, in addition to HD's chart, I
will post a few other charts so you can start to recognize this variation of the squeeze
pattern. Notice in each chart the equity is overbought.
5 1Fig. 1 6 Fig. 2
7 Fig. 3
8 Fig .4
9 Fig. 4
10 Perhaps, after looking at these charts, you have realized why the P3 ½ pattern is
harder to spot than the P3. The secret is in the ADX indicator. For the P3 and the
creation of the squeeze pattern, the PPO and ADX indicators are the reverse image of
each other. One indicator goes up and the other goes down.
If the PPO is up, then ADX strength line is down. Or if the PPO is down, the ADX
is up. It is this reverse pattern that creates the P3 1/2 squeeze pattern and when the
indicators run in the same direction, the sweet spot is formed.
So how is the P3 ½ different, making it tougher to spot? The ADX strength line
placed above the PPO support each other which makes the pattern harder to see. If the
PPO is up, so too is the ADX line most of the time as both indicators reflect the
movement of price going up or flat. As the price goes up, the PPO and ADX lines follow
the same path, it is when the uptrend starts to weaken that the P3 ½ starts to form.
The PPO and ADX lines are relatively close and the PPO line prepares to cross
down. Then, the –DI moves up to cross the +DI line, so that the trend will change to the
downside. The PPO crosses it signal line. Soon after, the PPO line and ADX line
spread apart and push away from each other to create the P3 ½ sweet spot. The P3 ½
pattern, in a sense, is the complete reverse of the P3. The sweet spot on the P3
Squeeze the lines run parallel in an upward direction, while the P3 1/2 sweet spot, the
push away from each other.
A signal that helps to spot the time when the PPO is likely to weaken enough to
cross down through its signal line is when the Wms%R is overbought. Unless an equity
receives bad news like a downgrade or reports poor earnings, it is likely being
overbought that will be the cause of the drop. As you know equities spiral through
cycles. They go up and then drop to test recent support levels, then they try climbing
again. Equities perform a dance of two steps up and one step back, over and over
again. It isn't until the market as a whole moves into a bear market that a substantial
drops takes place that can take months or years for prices to recover.
The beauty of P3/P3 1/2 is that one pattern flows into the other. This creates the
wave that can be ridden up and down. As the P3 ½ pattern unfolds and plays out, the
chart starts to form the P3 squeeze pattern. As the P3 squeeze pattern forms and plays
out, the P3 ½ pattern is forming.
Let me make a list of the stages for the P3 ½ and mark a few charts, so that you
can tie in this information.
We are getting closer to having all the elements in place for our strategy. Let’s
look at a few more P3 ½ charts where the stages are marked, and then we will move on
to tie everything together.
Stages of P3 ½ Put Pattern:
1) ADX and PPO come close together as they mimic each other
11 2)
3)
4)
5)
6)
7)
–DI Rising
PPO crosses down and over its signal line
–DI crosses +DI and eventually the ADX line
PPO wobbles against the signal line
Spread apart of PPO and ADX lines
Exit- Rollover of ADX line and drop of –DI
I will apply these reference numbers to a few charts.
12 Chart courtesy of Stockcharts.com
Fig. 5
13 Chart courtesy of Stockcharts.com
Fig. 6
14 Chart courtesy of Stockcharts.com
Fig. 7
15 Chart courtesy of Stockcharts.com
Fig. 8
16 Chart courtesy of Stockcharts.com
Fig. 9
17 Chart courtesy of Stockcharts.com
Fig. 10
18 I take a little yellow sticky note and write down the stages 1 through 7 with
abbreviated notations of the stages for both the P3 and P3 1/2 pattern and I keep them
by the computer. It allows me to quickly look at a chart and see exactly where a pattern
is at that moment.
The first clue that a P3 1/2 is forming will be that the stock is overbought and the
Wms%R and RSI are at a high range and overbought, while the WMS%R is beginning
to taper down and perhaps drop below -20.
The next sign is that the upper ADX and PPO are mimicking each other running
parallel and beginning to flatten and perhaps turn down. This can take place at the
same time as the weakening Wms%R or just afterwards by a few days. It should be
close enough that it seems like part of the same event.
From here, you will refer to the stages written down on the yellow sticky note or
cheat sheet. You will see the -DI gaining strength and the PPO will cross down through
its signal line and then the -DI will cross up through the +DI line.
For a day or two, the PPO line may wobble and head back up moving closer to
the signal line, but then it turns away and price drops further. The resistance of the
signal line was too strong. Price wasn't ready to cross through. The drop continues.
Then, momentum builds like a snowball rolling down a hill. A stronger drop
begins as the ADX line and PPO push away from each other. You take a deep breath
knowing as long as the lines are moving in opposite directions, the price will continue to
drop.
Once the PPO and ADX begin to slow down and flatten out, you may notice a
turn and the PPO will look as if it would like to cross up over its signal line. This is the
point to consider an exit. You should also notice that the Wms%R is in all likelihood
oversold and perhaps, beginning to taper upward toward the -80 line.
The P3 1/2 pattern needs to flow through all of its stages in the same way that
the P3 will ultimately flow through its stages. It flows from birth to it conclusion or
expiration.
So now you understand the stages of both the P3 Squeeze and the P3 ½
Squeeze patterns. As the P3 ½ forms and plays out, the P3 is forming. As the P3
unfolds and the time comes to exit, the P3 ½ is taking shape.
One pattern flows into and forms the other.
I will move on now and we will paddle into the strategy itself, tying in the other
indicators as confirmations. I suggest during this learning process that you do a lot of
chart gazing. Like walking the beach at night and looking skyward, the more often you
are able to pick out and identify the Little Dipper and Orion’s Belt, the easier it is to zero
in and identify those patterns no matter how cluttered the night sky. It is the same with
the charts. The more you skim through charts and locate the patterns, the easier it is to
spot them amongst all the other information on the chart.
19 Option Selection Guidelines
When you select a put option from the option chain, it is important to follow the
same Rules as they were outlined in the P3 book as to Open Interest, Delta, Spread,
Price of the Stock, how much time to purchase, etc.
The only difference is that you are purchasing Put Options instead of Call
options. You are selecting Put options because you are seeing the first signs of
weakness in the equity.
Here is a recap of the Rules:
In Review, the first 6 Rules to apply to our P3/P3 1/2 System are:
1. Purchase an option 1-3 months beyond the current expiration month. Ex: Current
month is March, buy April or May or June
2. Always buy a strike in the P3 and P3 1/2 System that is near (at-the-money) or
below (in-the-money) the current price of the underlying asset.
3. Focus your attention and purchase options on stocks, ETFs or indexes that trade
in a price range of $25 or up.
4. Don’t enter an option trade where the spread between the bid and the ask is
more than $.30 or enter a limit premium price less the amount to bring $.30 in
line.
5. Purchase options at or in-the-money with a Delta of .60 or better. With that
percentage or higher, you’ll make 60 cent or more for every dollar move of the
underlying asset.
6. Buy options on underlying assets that have risen and have now reached a top
and are overbought.
Trade Strategy
To enter and exit trades you are going to follow the same guidelines that were
laid out in the P3 pattern, but you are going to enter and exit based on the P3 1/2
pattern.
This is a recap of the P3 1/2 Rules. I will list them here since you are most likely
familiar as to how they apply to the P3 squeeze pattern, and after a review, we will see
how they play out on a few charts.
20 P3½ Entry Alert Signals that a trade is forming:
Recap Buy Rules:
Alert
1. RSI indicator turns and starts heading down. Bearish divergence to signal an
undercurrent of change brewing (seen on RSI or Wm%R)
2. Negative candle on the chart, and the 9-day EMA moving down and toward
the 15-day EMA
3.Black PPO and ADX lines are heading down and may start to spread apart,
away from each other.
4.PPO histogram blocks begin to narrow downward
5. -DI (red) line to be pointing and moving up, while the +DI (green) line points
and heads down.
6.Accumulation/Distribution begins to head down
Confirmed Buy Signal (whichever happens first or in conjuction with
each other)
1. The PPO line crosses down
2. The histogram crosses the zero line
3. The 9-day crosses down and over the 15-day EMA
4. A negative candle crosses below the 9-day EMA
On PEP's chart below, you will note that a P3 squeeze is wrapping up and the
first signs of a P3 1/2 pattern are beginning to form. RSI and Wms%R are heading
down. +DI and -DI are showing signs that they will be changing places.
You have your sticky note with the stages of the P3 1/2 pattern, now also write
down the alerts and confirmations you want to see take place before entering a trade
and start checking them off. 21 22 23 24 25 26 P3 1/2 System --Exit Rules:
As with your entry rules, you have signals that alert you to watch more closely
when the time to exit may be approaching. In a sense, you are going to think in
reverse, yet as in your entrance into a trade, you don’t want to jump the gun and cut
your profits short. As I stated at the beginning of the P3 book, you will be one of a
privledged few who will win most of their trades. When you have that Profit Probability
Potential on your side, you don’t need to squeeze every cent out of each trade, meaning
getting in at the lowest low or out at the highest high. Go for the the sure thing and stick
to the rules of your trading plan.
Exit Rules:
Recap Exit Rules:
Alert:
1.
2.
3.
4.
5.
6.
RSI rises from oversold area
9 EMA rises closer to 15 EMA, appears as if it might cross up and over
Positive candles (in conjunction with other alert indicators)
Wms%R rises above -80
PPO histogram blocks begin to narrow upward
Black ADX line flattens or curls downward, and +DI (green) starts to head up and
–DI (red) starts to head downward
Confirm Sell Signals: (these signals can happen in conjunction with other
indicators). Many times it is better to take gains once your trade reaches its profit
target rather than wait for a confirmed signal that gives back a portion of your profit.
The signals below are the line-in-the-sand exit signals, other than the price hitting
your stop.
1. Crossover of the PPO line up and over its signal line
2. Cross of the 9 EMA over the 15 EMA
From the top of the chart, you will go into alert status when you see that the RSI
in an oversold condition and showing signs of gaining strength.
On the candlestick chart itself (this is a main factor), when the gap between the
9-day EMA and the 15-day EMA start to narrow, get ready to push the sell to close
button. You can wait for an actual cross of these lines before you sell because the 15day EMA acts as resistance; the I can no longer say trampoline as it was in the P3, I
27 guess it would be a rubber-ceiling-effect often takes place. Yes, on some occasions, by
waiting for an actual cross, you will lose some profit, but then on the other hand, over
the course of all your trades, you will gain that loss and more back as well as save
numerous trading fees by waiting for an actual cross not just a touch.
Whether you choose to sell or hold for an actual cross of the PPO or EMAs can
depend on other signs of weakness. If most of the indicators are showing a bullish turn
and you have a profit, close the trade. If you are getting mixed signals, some bearish,
some bullish, it may pay to wait for an actual cross before selling.
Now in the case of the PEP trade, I can fast forward so we can use it as our
example for exit signals. On PEP's chart below, you will see what you want to happen
when the P3 1/2 plays out to be sure the down trend is over. The area on the chart
below between August 1 and 8th is a perfect example of the stage 5 wobble. This little
upward jog would have been more than enough to shake many traders from the trade.
They would have assumed that the stock was recovering after that big negative candle.
Because to know and are aware of the stages of th P3 1/2 pattern, you
understand that price often wobbles and tests resistance. So you held to see what was
going to happen and then price dropped again.
Price rose to touch the 9 and 15 EMA lines and then dropped again. This is an
example of the 15 EMA acting as resistance, the rubber ceiling effect and the Price
dropped until it hit the sweet spot (stage 6) where the PPO and ADX lines spread apart.
So now we start watching for the final stage (stage 7), the rollover stage when we
will exit.
When price reached the support area of 78.00 from mid-June, it started to flatten
out to form a bottom. Other indicators (RSI, Wms%R, PPO histgram) start a more
bullish bias, so you close the trade.
Another sign that it is time to consider an exit is the formation of a P3 squeeze
pattern. The pattern is still in the early stages, but you can easily see it on the chart.
28 This feels like price is forming a bottom. You have made a nice profit. There's no sense being greedy. Time to exit.
29 This is exactly what you want to see ... a profitable drop once you enter a P3 1/2
Profit Probability Potential Put trade.
Let's see what happened after you closed the trade.
You exited the trade a few days ago. The price didn't move much over the next
week, but finally the PPO line crossed up and over its signal line.
This cross of the PPO line would be one the first exit confirmation for the P3 1/2
pattern but it would also be one of the first confirmation of a P3 squeeze pattern.
Though this discussion is in regard to wrapping up a P3 1/2 Put trade, please take note
that even though the PPO crossed the signal line and a squeeze is beginning to take
shape, the +DI is heading down and isn't yet showing any sign of adding momentum to
a bullish trade.
Your exit was based on solid indicators that pointed to closing the trade and it
isn't yet time to consider a call trade, but this is an excellent example of how one pattern
flows into the next.
30 31 Stops:
Before we continue, I’d like to discuss stops. The P3 ½ pattern stop would be a
cross of the PPO indicator that moved opposite to the trade direction. If you entered a
trade on a PPO cross down after the other pattern alerts and a day or two later price
and the PPO line headed back up to cross the signal like. It is time to exit the trade.
This in all likelihood will result in a small loss, but it is better to take a small loss
than hold on to a losing trade with the hope that it will again change directions. It is
possible that in another few days the stock will weaken further and you could consider
the trade again. It does happen that an equity will lose steam and then have one
remaining burst of energy before it gives out altogether. But it is important to have your
trading plan in place. Know your entry rules, your exit plan, potential profit target and
stop should the trade turn against its direction.
Well-Rounded Trading Strategy
The addition of the P3 1/2 pattern to the P3 pattern rounds out the strategy. You
now have the tools to trade both sides of the market. You can place trades when an
equity is rising by purchasing call options and you can trade the downside by
purchasing put options.
Having the flexibility provided by two opposing patterns creates a well-rounded
strategy for being ready to trade and profit no matter what the market hands out. You
profit whether the market is heading up or down. Removing all the other indicators except those that create the pattern, you can
easily see how one pattern flows into the other.
32 Studying and becoming familiar with the stages of both the P3 and P3 1/2
patterns allows you to look at any equities' chart and instantly know exactly where it
stands in the formation or unfolding of either a P3 or P3 1/2 pattern.
Your Profit Probability Potential has just been expanded.
33