Looking For 3 Drives On SPY & QQQ

I asked Shooter to discuss a pattern called a “3 Drive” for us. It’s an extremely powerful technical pattern that presages many bullish rallies. His mentor Dale Pinkert, who has interviewed me over at Forex Analytix several times, is an expert on the 3 Drive and has used it to make a lot of profitable trades. Please read Shooter’s description below and start looking for 3 Drives. – Kirk

RSI Divergence

An RSI divergence takes place when the RSI moves in the opposite direction of price. This means that there could be a shift in momentum on the chart, even before a corresponding change in price occurs. When the RSI shows an oversold reading, followed by a higher low while the price displays lower lows, it is called a bullish divergence and vice versa for bearish divergence.

3 Drives

A 3-drive is harmonic pattern and technical signal that utilizes RSI divergence along with Fibonacci Extension to measure potential price reversals in the current trend. This pattern consists of three consecutive price swings (A confirmed high or low, and two divergent highs or lows is RIS), where the first and the third swing are equal in length and have a similar angle (What I call a form of Equality!), while the second swing is typically shorter and has an opposite angle to the first and third swings.

So, how do we confirm we have a 3-Drive?

  1. To confirm the presence of a 3-drive harmonic pattern, certain conditions must be met.
  2. The first leg of the pattern should be a strong price move in one direction, followed by a corrective wave, which retraces a portion of the first leg’s move.
  3. The second leg should be a counter-trend move that retraces more than 61.8% of the first leg.
  4. The third leg should be a move in the direction of the first leg, and it should have a similar angle and length to the first leg.
  5. The final leg should be a move in the opposite direction to the third leg, typically retracing around 61.8% of the third leg.

Now, there can be many variations in the 3-drive harmonic pattern, depending on the length and angle of the legs, market liquidity and the retracement levels of the second and fourth legs. These variations can make the pattern more or less reliable, and traders often use additional technical analysis tools and indicators to confirm the pattern’s validity before entering a trade.

This is an example of textbook 3-drive:

SPDR S&P 500 ETF Trust (SPY) Weekly

Currently, I’m not seeing a 3-drive on shorter time frames in the S&P 500. The weekly chart below has divergence in RSI that is more consistent as an XABC patterns vs a 3 drive. The prior higher high in price is not symmetrical. Note the 3 arrows, RSI did not confirm on Drive one and presents more of a triple top in RSI vs. a confirmed high.

SPDR S&P 500 ETF Trust (SPY) Monthly

On the other hand, what I do see are what I call 3-Mounds in the S&P. In short, they function similar to 3-drive yet lack much of Symmetry that is required to be considered a 3 Drive and are a little more dicey to trade compared to high and tight 3-drive. Yet, much like a 3-drive they originate from an overbought or sold point in RSI which is often a confirm low or confirmed high in one of the Mounds (Confirmed High Bull case: higher high in price and a higher high in RSI and vise versa Confirmed Low Bear case: lower low in price and a lower low RSI) that is an overbought or oversold RSI reading on a monthly chart.

3-drive are best traded from the 4-hour with high and tight counts. Were it gets dicey with a my thesis on 3-mounds is that your confirmed high/low in RSI is most often occurs on the second mound, but can occur in any of the three mounds. Whereas in a 3-drive your a confirmed high or low always occurs on the 1st Drive one.

Odds of deeper correction: Even with the distortion I’d give a 50% retrace a 50% chance of happening here, a 75% retrace a 25% chance, and 100 retrace an 8% chance.

Invesco QQQ Trust Series 1 (QQQ) Weekly

Similarly to S&P 500, I’m not seeing a 3-drive on shorter time frames in the Nasdaq. The weekly chart below has divergence in RSI that is more consistent as an XABC patterns vs. a 3 drive. The prior higher high in price is not symmetrical. Note the 2 arrows though, RSI did not confirm on Drive one even though there is divergence. The last confirmed high Jan 2020 and presents more a XABC pattern vs. 3 Drive symmetry.

Invesco QQQ Trust Series 1 (QQQ) Monthly

The Nasdaq is very similar to the S&P however it is more sumsetrail. Yet, I’d still call this a 3-Mound, because the second Mound has the confirmed high vs. the fact 3-drive requires Drive one to be the confirmed high or low.

Odds: Even with the distortion I’d give 50% retrace a 50% chance of happening here, a 75% retrace a 25% chance, and 100 retrace an 12% chance. AKA, I added 6% because of the Symmetry for 100% retrace.

Scott Henderson’s Risk Disclosure & Disclaimers

Remember to follow Shooter on Twitter @swingtradenotes for added market thoughts.

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