Plunge or Just a Pull Back—How Do You Know? (Part 3 of 5)

08/20/2008 12:00 am EST


Timothy Morge


In this scenario [remember, we’re going to look at a number of them and then you get to choose which was the actual price action as it played out and which were just ‘alternate possibilities’], price breaks back above the top of the Energy Coil and closes above it with great separation. This is a sign of strength and just as important, after a nice sell off, it is a change in behavior. This is price giving us a clue about the probable path of price.

Looking at the chart  above, is price likely to head higher now or head back into the Energy Coil?

I’ll bet most of you saw this one coming. Once price closed above the top of the Energy Coil—which was price’s change of behavior—the buyers were completely in control of this market. Price quickly made a new high.

Was this the ‘real’ price action? Let’s see another potential way that this may have played out before I ask you to make a final choice.

Well, this is different. Price easily broke below the 38.2 percent retracement area. It’s testing the 50 percent retracement area, actually. And once again, after a quick sprint in one direction, price has formed an Energy Coil. Price is re-storing energy. Do we have ANY clue yet about the probable path of price from this point forward?

Once again, this price scenario leads to a break above the top of the Energy Coil. And although the price action is not as vertical as it was in the prior scenario, it IS making higher highs and higher lows, a sign of strength. Once again, price gave us a change of behavior that was easy to spot IF you were looking for it. Once you start paying attention to what price is doing while it forms each and every bar, you’ll begin to see these changes in behavior.

Alright, let’s take another vote: Is price headed higher from here or back to the Energy Coil? It’s come off its highs quite a bit. Do you have an opinion? Will it trade lower and break back into the Energy Coil or head higher from this point?

More tomorrow in Part 4

Timothy Morge  e-mail me

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