A Spike member asked me how I find the 1,2,3 Bottom patterns and Alex suggested I post my reply.

I find it nearly impossible to come up with an accurate screen for this pattern, so I do it the old fashion way. Because I’m a Mac guy, I use an old charting software system built for Mac computers, and a database of about 500 large cap and ETFs. I’m a short-term swing trader and use 2-day RSI and 2-day FI to measure short-term oversold and short-term overbought. I buy weakness and sell strength, so I look for longs if the S&P is oversold and shorts if the S&P is overbought, and rank all my stocks by their 2-day RSI and look for longs if the 2-day RSI is under 20 and shorts if it is over 95.

Then I cycle through each daily chart looking for reversals or other set-ups. It usually takes me about 20 minutes to go through them all and I do it once a week or so. I often trade these 123 Bottom patterns (if the weekly charts are favorable) and usually hold them for a bounce to the downtrending 20 day EMA. In the case of NSC, I took profits very quickly because I don’t trust this market and I’m going out later today and don’t want the profits to slip away. I did the same with DIS, EWZ and KO, but still hold GS with a tight stop. The set ups for EWZ, DIS and GS were variations of the 123 B, but KO was a failed break down with major bullish divergence (a set up that Alex has described several times). I picked them all up by cycling through my 2-day RSI stocks that were below 20. I’m particularly careful these days because of the chop caused by ultra high correlation between the dollar and stocks, so I take profits quickly.

If the market holds together, I will revisit these stocks in a few days to see how they handled the resistance from the downtrending 20 EMA. If they consolidated, or the 8 EMA crossed up through the 20 EMA, I’ll look for a continuation trade. If they fail at the 20 EMA, but hold support at the bottom of Spike #2, I’ll probably take another shot long if the MACD strengthens. If they crash through support at Spike #2, then the game reverses and I’ll short them.