The “Spike and Ledge” pattern was first defined by Larry Connors and Linda Raschke in the book, Street Smarts. As the name suggests, markets make a “climax high” or “climax low” (New High or New Low) spikes followed by a resting point or “ledge” then a reversal of the prior trend.
A “Ledge” pattern is defined as a series of bars with matching lows and highs within a certain number of bars, namely 20. Usually “ledge” patterns are considered as a resting point before markets pick a clear direction, which is mostly a reversal of the current major trend. Ledge patterns are effective in all time-frames but they are more effective during intra-day trading.
Trade: Set a trade entry at the “breakout” or “breakdown” from the “Ledge” formation. Wait for a clear breakdown or breakout and enter at the low (or high) of this bar.
Stop: Place a “stop” order on the opposite side of the “Ledge” pattern. For long trades, place a “stop” order below the low of the “Ledge” pattern. For “short” trades, place a “stop” order above the high of the “Ledge” pattern.
Target: Usual targets would be the prior “major swing high” for long trades or prior “major swing low” for short trades from the “breakdown” or “breakout” levels. If markets experience a “gap” prior to the “Spike” formation, targets after a breakdown/breakout from the “Ledge” pattern would be the “gap” levels. Otherwise, the target would be a prior “swing low” or prior “swing high” before the “Spike” formation.
Trading Spike and Ledge Pattern
Trading Spike and Ledge Pattern
The example above illustrates a “Spike and Ledge” pattern from the QLogic (QLGC) daily chart. QLogic made a new “high” in November, 2006 and closed near $23. The last few days in November, 2006 were of high volume trading. After making a new high, QLogic attempted to sell-off and formed a “Ledge” pattern with matching highs and lows. In January 2007, QLogic broke out of the “Ledge” pattern and presented a “short” trading opportunity.
- Enter a “short” trade below the low of the breakdown bar at $21.50
- Place a “stop” order above the high of the “ledge” pattern at $22.50
- Target the major “swing low” prior to the “spike” at $19.
Trading Spike and Ledge Pattern
Trading Spike and Ledge Pattern
The chart above demonstrates a “Spike and Ledge” pattern from the Google daily chart (GOOG). After a sell-off in July 2006, GOOG made a climax sell-off to close below 365 with high volume. In September 2006, GOOG attempted to rally back and made a “Ledge” formation with a series of matching highs and matching lows. A breakout above the “Ledge” formation signals a “long” trade to the upside.
- Enter a “long” trade above the high of the breakout bar.
- Place a “stop” loss below the “low” of the “Ledge” pattern.
- Place a “target” at “swing high” prior to the down “Spike.”
Source : “Trade Chart Patterns Like the Pros” by Suri Duddella