How to Make Money While the Train is Refueling! (Part 2)
06/03/2008 12:00 am EST
Let's take a closer look at the consolidation area from the chart from yesterday.
Now remember that I don't know if a change in trend is occurring or if price is just refueling before turning back lower. I already have a blue up-sloping median line and its parallels that show me the probable path of price IF a change in trend has occurred. To give me the probable path of price if the trend has NOT changed, I draw in a red down-sloping median line set. I now have price 'boxed in' by a blue up-sloping median line set and a red down-sloping median line set.
You can see that price tested the prior highs at the blue up-sloping Median line and then turned back down. It then tested the Lower median line parallel and found solid support. After trading higher, it tested the red down-sloping upper median line parallel, peeking briefly above it. But look at the close of the last bar on this chart: Buyers had every opportunity to take control of this market-they clearly had it above the red down-sloping parallel-but sell orders came in and the bar closed on its lows, back within the red down-sloping upper median line. This is a sure sign of weakness. The space between the red down-sloping upper median line parallel and where price closed I call down side separation and it is a quality I examine to determine whether the buyers or sellers are in control of a bar after it closes. In this case, the sellers were clearly in control.
Because sellers were in control of this bar as it tested up side resistance, I feel the market is likely to move lower. If I am right, I will need further measuring aids to give me areas of support and resistance as price trades lower, so I add in a blue up-sloping lower warning line, which has the same slope as the median line and is the same distance below the lower median line parallel as the lower median line parallel is below the median line. I now have an energy point, an area where an up-sloping line crosses a down-sloping line and I expect that this energy point will attract price, so I'll watch this area carefully.
More in Part 3 tomorrow.