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Trading Setups (Part 1)
06/30/2008 12:00 am EST
This week we’re going to outline several setups recently discussed by Toni Hansen of TradingFromMainStreet.com.
Description: This pattern is a form of a double bottom, whereby the second low is just slightly lower than the first, serving to trap new shorts and flush out those holding onto positions as a long. A 2B is also a form of a bear trap, since it traps any new short traders, as well as flushes out any remaining bulls who have suddenly become scared that the bears are going to continue to push the security lower.
Criteria: One low followed by a slightly lower low. The second low should not be barely noticeable as a lower low in order to be the most favorable as a reversal pattern. Intraday this may be just a few ticks but it could be a few points in a stock on a weekly chart.
Entry: Over the prior bar's high after the second low is made. For instance, if the high of the bar making the second low is $50, entry is over $50. The only time it is not over the bar that made the second low is if that low is followed by an inside range bar, in which case the entry is a break in the highs of the inside range bar. Alternately, a downtrend line can be drawn on the move into the second low with an entry when that trend line breaks, as well as the previous bar's highs in that smaller downtrend into the second low.
Stop: Under the second low or drop down and watch for a smaller time frame Phoenix or Reverse Head & Shoulders pattern to place the stop under a smaller time frame base which is higher than the absolute low of the second low.
Target: Price or moving average resistance. The more levels of resistance converging at one particular level, the more likely the move will stall or end there. Correction periods will also often stall or end a move.
Ideal 5 Tech Tools Traits on a 2B Setup:
Pace: Strong initial move into lows, followed by a much more gradual move into the second low. Sometimes it will begin by moving slowly into the second low and then make a rapid move at the last minute as it comes into the prior low with a spike in volume. When this happens then a Phoenix or a 2B on a smaller time frame is common before a larger correction off the lows occurs.
Volume: Strong volume on first low with declining volume into the second low.
Correction Periods: First and/or second lows hitting with a correction period.
· Support on multiple time frames or multiple types of support hitting at once.
· When the security hugs a resistance level as it moves into the second low.
· When there is no immediate overhead resistance to stall a move higher off the second low.
Trend Placement/Trend Development:
· Watch for this setup to follow three waves of selling. Sometimes the second low in the 2B is the third one in a larger trend. Sometimes it is a fake attempt at a fourth continuation in a trend.
· This pattern can also form within a trading range and is particularly of interest when that base is at highs in a larger uptrend leading to a breakout from the trading range.
We’ll show an example of a 2B setup in tomorrow’s Tip for Traders.
By Toni Hansen
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