# How to Trade the Popgun Setup

06/17/2010 12:01 am EST

Focus: STRATEGIES

I’m no doubt dating myself, but when I was a kid, I had a popgun, the old-fashioned kind with a cork and string (no fake Star Wars light saber for me!). You pulled the trigger, and the cork popped out of the barrel attached to a string. If you were like me, you immediately attached a longer string to improve the popgun’s reach. Why the reminiscing? Because “popgun” is the name of a bar pattern I would like to share with you this month. And it’s the path of the cork (out and back) that made me think of the name for this pattern.

Click to Enlarge

The popgun is a two-bar pattern composed of an outside bar preceded by an inside bar. (Quick refresher course: An outside bar occurs when the range of a bar encompasses the previous bar, and an inside bar is a price bar whose range is encompassed by the previous bar.) In Chart 1 (Coffee), I have circled two popguns.

So what’s so special about the popgun? It introduces swift, tradable moves in price. More importantly, once the moves end, they are significantly retraced, just like the popgun cork going out and back. As you can see in Chart 2 (not shown), prices advance sharply following the popgun, and then the move is significantly retraced. In Chart 3 (not shown), we see the same thing again, but to the downside: Prices fall dramatically after the popgun, and then a sizable correction develops.

How can we incorporate this bar pattern into our Elliott Wave analysis? The best way is to understand where popguns show up in the wave patterns. I have noticed that popguns tend to occur prior to impulse waves—waves one, three, and five. But remember, waves A and C of corrective wave patterns are also technically impulse waves. So popguns can occur prior to those moves as well.

As with all my work, I rely on a pattern only if it applies across all time frames and markets. To illustrate, I have included two charts of Sirius Satellite Radio (SIRI) that show this pattern works equally well on 60-minute and weekly charts. Notice that the popgun on the 60-minute chart (not shown) preceded a small third wave advance. Now look at the weekly chart (not shown) to see what three popguns introduced (from left to right), wave C of a flat correction, wave 5 of (3) and wave C of (4).

There’s only one more thing to know about using this popgun trade setup: Just be careful and don’t shoot your eye out, as my mom would say.

By Jeffrey Kennedy, author, How to Use Bar Patterns to Spot Trade Setups