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

08/22/2008 12:00 am EST

Focus: STRATEGIES

Timothy Morge

President, MarketGeometry.com

What if you took the double tops and the potential forming tropical depression and used them as your ‘change in behavior’? Are those two enough to entice you to sell a test of the down sloping Upper Median Line?

Remember, price still hasn’t traded down to test the 38.2 percent retracement, so it’s still very strong. Price DID trade below a mini Swing Low, but it hasn’t traded below any major Swing Lows.

Would you take this short entry in the soybeans? Or are the other scenarios more enticing?

What would you have to risk on this trade? You would have to place your initial stop loss order above the all-time highs, in my opinion. That’s about $1000 a contract away!

Is this a plunge or a pullback in an up trend? Have you decided?

In this scenario, price continued to spike lower, through the 38.2 percent retracement and then consolidated in an Energy Coil just below it. Price is resting now, re-storing energy.

Do you see a change in behavior? Do you think you know the probable path of price going forward? Is this the pause in price before it heads back higher or is this the pause before the plunge? What will it take for you know?

In this scenario, price didn’t change behavior. It caught its breath and then headed lower again. None of the geometric retracements were of any help. Price simply headed lower and after a brief pause continued lower.

Now the tough question is at hand: Which scenario was real? Don’t peek! Choose before you read further!

This last set of three charts is from an actual trade that was just closed out this week. I got short at the test of the Upper Median Line Parallel, at 1619 ¾. My initial stop loss order was indeed above the prior Swing High. I risked $1000 a contract because my initial profit target was a test of the Median Line. In 21 trading days, price moved from my initial entry at 1619 ¾ to my profit target at 1184 ½, a move of over 435 points, which is well over $21,000 a contract before brokerage. I was also short soybean oil, which had a similar move.

For those of you that just trade stocks and stock indices, you’d be shocked just how fast commodities move when they trend. I think we are in a period where the big moves are going to be in commodities, currencies and interest rates. I’ve been speaking about this at the Traders Expos for the past several years and I hope some of you are starting to take a peek at commodity charts as well as the E Mini S&Ps.

Before I close, let me point out that even in the ‘potential’ scenarios, the key was waiting for price to make a change in behavior. And of course, that means that if you have a position in the direction of the trend and have a nice profit, by all means protect your profits. But until you see a change in behavior, the trend is probably intact.

I hope you found these various scenarios interesting enough to get you to look for changes in behavior in the markets YOU trade.

I wish you all good trading.

Timothy Morge

tmorge@sbcglobal.net  e-mail me
www.medianline.com
www.marketgeometry.com

Related Articles on STRATEGIES