I Spy a Large Trading Opportunity–How You Can Too (Part 3)
06/18/2008 12:00 am EST
You can see on the chart below that price traded lower, heading down towards the Lower Median Line Parallel but failed to make it down to test this 'most likely line.' According to median line theory, price should make it the 'next most likely line' 80 percent of the time-and when it doesn't, traders should be on the lookout for a larger than normal movement in the opposite direction.
Normally, price would be contained by the red down sloping Upper Median Line Parallel but because price did not trade down to its 'most probable line', it broke above the Upper Median Line Parallel. Looking at the details of the price action above this Upper Parallel, you can see that price failed to re-test the 117 14/32 area, left double tops and then headed lower-the last bar closing back under the Upper Median Line Parallel and on its lows. All of these are signs of weakness. Let me illustrate this simple principle on another chart:
Note I added a Sliding Parallel where price stopped on the down side and another where it stalled on the up side. And you can see that they are about the same distance from their respective Parallel Lines (the distance from the lower Sliding Parallel to the Lower Median Line Parallel is actually ? a bond tick smaller).
More in Part 4 tomorrow.