Trading the Reversal When prices reach the last and the 5th swing point and fail to continue higher (as a breakout), Megaphone pattern may be presenting an opportunity to short on its reversal. Once price starts to decline from 5th swing point, wait for prices to close below the 3rd swing and enter a short trade. Trading Example The following example shows both Megaphone continuous and Megaphone reversal pattern formation in current The Priceline Group (PCLN) stock. Priceline (PCLN) stock rose from a low of $45 (1998) to a high of $1600 (2016), a 3400% increase. Currently, it is forming a Megaphone pattern as it made three swing highs and two swing lows in a steep uptrend. The case for both continuous and reversal trade setups are presented here. Trading PCLN breakout (Continuous) 1. Currently weekly close of PCLN is $1540 with a high of $1601. 2. If price trades above the $1601 (5th swing pivot), PCLN may signal as Megaphone breakout pattern and the trend may continuous to trade higher. Price Targets The price targets in Megaphone breakout (continuous) pattern are computed using the Fibonacci ratio of the pattern height (vertical distance) added from the breakout levels. The price targets for the Megaphone reversal pattern are the midpoint of the pattern and the area between 4th swing and lower trend line. Historically, this would be the widest part of the pattern and is a very profitable target. Stops When trading Megaphone pattern breakouts, the "third swing high or low" and the “mid channel point” in the pattern as the critical points and trades should be protected with a stop at these levels. When trading the reversal, the stops should be placed outside the trend line (above the 5th swing point) to protect the trade. 3. Enter a long trade above the high of the bar that closed above $1601. 4. Place a stop near 3rd swing high ($1475). 5. The height of the Megaphone pattern is $650. 6. Targets are placed at 62-79% of its height computed from the breakout level to $1995-2091.
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