How to Improve Your Market Direction Forecasting Skills (Part 2)
03/10/2009 12:01 am EST
Let’s look at another set and see if you see any signs that tip off the market’s direction:
Price trades quite a bit lower and then leaves a set of lower bars, the first lower than the second, before beginning a nice climb out of the hole. This particular formation has an almost pleasing look to my eyes and I tend to mark it as a potential rounding bottom—but remember, it isn’t anything but a group of bars until price makes a significant gain or loss.
In this case, price has come to the moment of decision: Is it a rally that will continue or a simple pullback in a downtrend?
What do you see? What does your intuition tell you? Can you “see” the probable path of price?
I zoomed this one in a bit to show you how price played out right after it had reached its moment of decision—and to show you just what it ended up doing as time went on.
Price did climb further—but it didn’t do what I thought it would do. Once it climbed above several swing highs, it ran into the red, down-sloping Median Line and it turned down hard—in fact, you can see it left three lower highs! And to make things even more interesting, it left three higher lows! Price made three drives to the top and three drives to the bottom. I certainly never saw that coming. Did you?
Price did eventually take off to the upside, but it was quite a battle until it broke above the line connecting the three drives to the top (which also happened to be a red, down-sloping Median Line). And if you look at the blue, up-sloping Median Line I added after price broke out to the upside, there was even an opportunity to use my favorite trade entry set up—the test and re-test—to get long with a quality initial stop loss.
We can draw, we can plan, our intuition can tell us where price is headed, but in the end, the market is always right! That’s why I trade what price shows me, not what I think!
More tomorrow in Part 3.