I Spy a Large Trading Opportunity–How You Can Too (Part 8)

06/25/2008 12:00 am EST

Focus: STOCKS

Timothy Morge

President, MarketGeometry.com

I removed the extensions of the original red down sloping Median Line and its Parallels to make the chart less busy. When I added the down sloping green Median Line and its Parallels and then watched price make a new low, confirming lower highs and lower lows, and then saw the top heavy resistance at 117 14/32 that has been tested and tested and tested hanging over this market, I immediately saw a new potential formation in my mind: a Chimney, which is a near vertical pathway that allows price to move in one direction with little or no resistance until the chimney’s target is reached.

I added the lines of force in the chimney formation to the chart above, as well as a circle surrounding the most probable target for this formation, the confluence formed by the Lower 1st Warning Line below the magenta Lower Median Line Parallel and the green down sloping Median Line. Because of the great deal of overhead resistance and the amount of time price has spent trying to break above the 117 14/32 area, I think a steep chimney formation rather than a gentle cascade is much more likely to form when traders patiently watching their 117 13/32 and 117 14/32 limit sell orders suddenly decide its time to sell ‘at the market’, chasing this market lower.

In the end, I may be incorrect about which formation appears, but the stop orders are the same, so I decide to cancel my limit buy order, which was based on a gentle cascade formation lower, and instead replace it at the area of confluence that is based on the steep chimney formation. That area of confluence comes in at 115 16/32, which nearly doubles the risk reward ratio on this trade in my favor.

More in Part 9 tomorrow…

Tim Morge
tmorge@sbcglobal.net
www.medianline.com
www.marketgeometry.com

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