The “Three Up, Three Down” Trading Strategy (Part 3)

So, let's now look at what the market did after it broke the three drives to the bottom line. The market's move was more elegant and the geometry was right out of the math textbook Euclid wrote in ancient Greece 2300 years ago! Price retraced to test the upper Median Line parallel, giving traders a high-probability area to enter a short position and then collapsed. And if you simply measure the move, price made a perfect 1:1 movement to the downside, meaning it moved as far down from the retracement as it did in its original fall that broke the three drives to the bottom. And that measured move tested the red, down-sloping Median Line perfectly. Where you would expect price to run out of downside directional energy?

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My imagination pales in comparison with the market's natural move, but by playing “what if” before the move unfolds, I am prepared and looking for signs of what the market may give me.

Let's look at another market from that same day:

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Here's a non time-based 24-hour chart of the e-mini S&P futures. I have clearly marked the three drives to the top and bottom lines, and you can see price is now breaking below the three drives to the bottom Line.

Let me clean this chart up for you and zoom in a bit:

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Now you can see that the second and third drives to the top and bottom, and price, have clearly broken below the three drives to the bottom line. This is how the chart looked as we studied it during the pre-market morning session, between 6:30 am and 7:30 CST.
What will price do now that it has broken below the three drives to the bottom line? Remember, it's more than hour before this market officially opens. I feel the first hour of trading is generally chaotic, because hedge fund managers and stock portfolio managers spend that first hour balancing their positions, not making directional trades.

Let's see what I imagined that morning, well before the market open:

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When I looked at this chart during the pre-market session, I imagined that the hedge fund managers and stock portfolio traders would have enough balancing to do to keep prices within a trading range and hopefully give me a chance to enter a short position at a high-probability area. Then I thought prices would eventually begin an accelerated selloff.

My inclinations are interesting and help prepare for what may happen, but what the market actually does is what really counts!

Timothy Morge

timmorge@gmail.com
www.medianline.com
www.marketgeometry.com