Strong continuation pattern on Ethereum’s 4-hour chart. High probability of big breakout soon, after a small retracement.


Ethereum’s 4-hour Chart



Of all the chart patterns that are out there, there are few that have such a high frequency of appearing. On both the long and the short side of the market, traders often find the ever-common flag and pennant formations. Flags and pennants are consolidation patterns that appear after a sustained move, typically a trending move. These patterns appear on all charts on all time frames. One of the reasons they are so popular with traders is that they have enough of a frequency to trade, but that they also have clear entry and exit rules. Flags and pennants are also some of the most profitable patterns in all of trading. There are many traders who only trade these patterns, and that’s it.

On Ethereum’s chart above, we can see two trendlines: one bearish and one bullish. They form an apex which forms a triangle (which is its own pattern) – the pennant. Triangles themselves have rules associated with them – in this case, we have a symmetrical triangle. Without going into a significant amount of detail, know that price will typically breakout of a triangle in the last 1/3rd of the triangle. We are certainly in that zone. Additionally, volume tends to drop off as price consolidated, before increasing just before the breakout. If we look at the volume above, we can see that volume has dropped off by a considerable amount – note the yellow 20-period moving average overlaying the volume bars. But the current and past two 4-hour volume bars show volume increasing – indicating an impending breakout higher. However, pennants have an increased probability of reversing. Unlike flagging patterns, triangles are a bit trickier to trade and susceptible to some whipsaws. This is especially true when we look at the pennant, which is a symmetrical triangle.

If price was to travel lower – and I do think that it is a high probability Ethereum would trade lower – it would be limited. There are two price zones that are important to recognize. First, is the 45-degree angle (not shown). That angle represents an area of equilibrium and fair value – but that rests below at the $210 value area. The second important level is the 1/8th Major Harmonic at $181.38. Within the Ichimoku system, there is another piece of evidence that suggests a small retracement. On the daily Ichimoku chart, price is a considerable amount of distance from the daily Kijun-Sen. If we think of price attached to the Kijun-Sen by a rubber-band, then the further price moves away from the Kijun-Sen, the more difficult it is to keep moving away and the more likely price snaps back to that level. One strategy that can be used by traders is to record the extremes that price moves from the Kijun-Sen and then average those value – what we get is a ‘max’ distance that price will move from the Kijun-Sen before a mean reversion occurs.