Bonus #4) Specialist Trap

Here’s a specific price pattern I have used since 1966 in stocks and commodities. In the
case of a buy I look for a market that has been in a strong down trend, that moves
sideways for 6 or 20 days.

What’s happening is it looks like the down trend may be over, that the market is in the
process of bottoming out.

I then wait for a break to new lows, a close below the trading range. As I see it, this
scares the public out of the longs they have recently acquired…the break out usually
means they went short…and may be caught in a trap.

The trap takes place if within 3 days of the new low close, price rallies back to the high of
the day prior to the new low close.

For a sell, look for a strong up trending market, that goes into a sideways trading range or
"box" for 6 to 20 days, then thrusts up on a big breakout day. It may go on, or it may not.
Our sell will be at the true low of the day before the break out day.

Figure 5-5: Specialist Trap Buy & Sell

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Copyright © 2006 Larry Williams
 SPECIALIST TRAP IN NEWS CORP
In the example shown in Chart 5-1, the trading range occurred from 11/17/03 to 12/05/03,
and on 12/08/03 the new low close was seen.

What should have happened, what usually does, is price keeps going lower. But, if price
can immediately rally back to the high of the day prior to the break a buy signal is given,
in this case at 34.08.

Chart 5-4: News Corp Ltd Daily Price Chart with Specialist Trap Buy

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Copyright © 2006 Larry Williams
NOW LET’S LOOK AT A SELL… The sell pattern is just the reverse. Again, I look
for a large up trend, then a sideways market, resolving itself with a new high closing
price.

The new close sets the trap. If price immediately collapses, I define that as getting back
to the low of the day prior to the break out, a sell signal is issued. Chart 5-2 shows this
happening in News Corp.

Chart 5-5: News Corp Ltd Daily Price Chart with Specialist Trap Sell

Traders will see this pattern on weekly, daily and intraday carts. It is one I have used
since 1969 and found to be one of the very few effective “chart patterns.” I think that it is
more than just a pattern; what it reflects is the state of mind of traders.

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Copyright © 2006 Larry Williams