A few weeks back, I kicked off the Intelligent Investor Series as part of my weekly commentaries. Th...
Plunge or Just a Pull Back—How Do You Know? (Part 2 of 5)
08/19/2008 12:00 am EST
Now let me throw in another clue: The day after those double tops formed, while riding in the car with my wife, she asked me if I had any long-term grain positions on. I gave her an odd look and then asked her why she asked [my wife literally NEVER asks about my positions or how trading is going]. Her answer was simple and to the point: “Odd we haven’t had a hurricane yet, huh? I heard on the radio this morning there may be a tropical depression forming.” Sometimes you just have to admit your spouse is smarter than you are…and of course, after all these years of not asking, she had obviously been listening and watching. If she hadn’t mentioned it, I would have completely missed the news about the potential tropical depression forming—and I probably would not have been as alert for a potential trade.
Let’s see what price had in store for us over the next few days:
When my wife told me about the potential tropical depression, I added in this down sloping red Median Line and its Parallels. Three days later, price tested the down sloping Upper Median Line Parallel and closed below it with good separation. But note that price is still fairly close to its all time highs. Is this a pullback in a strong up trend caused by the ‘threat’ of a potential tropical depression or is it the beginning of a new down trend?
What do you think? Are there any other tools I can add to help you ‘read’ the market?
I talked earlier about the geometric contractions and expansions. These are signposts on the ‘Market Maps’ for me, because so many people use them and look at them. My first rule of thumb is very simple: If you are in an up trend, price really isn’t showing any sign of weakness until it can get through and close several times below the 38.2 percent retracement. And looking at the chart above, you can see that price is a very long ways above that area.
That’s all the clues I have for you right now. Do you have an opinion yet? Plunge? Pullback?
Before you get too excited, let me stop you and remind you that we’re going to look at several scenarios. And then I’ll tell you which one really played out and which were just possible outcomes that never happened. Is this the real outcome? What do YOU think?
On the chart above, price came down to the 38.2 percent retracement. What else should we be noticing on this chart?
Price not only came down to the 38.2 percent retracement level, it then formed a gorgeous Energy Coil. Remember Itzhak Bentov’s assertion? The buyers and sellers are about equal at this area apparently, so price is resting, re-storing its energy before making its next move.
The NEXT move! That’s what you want to know about, right? Do you have an opinion? Is this a pullback in a strong up trend or a pause in a new down trend? What would price have to do to show us the probable path of price?
More tomorrow in Part 3
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