A Pro Trader's Reversal Rehearsal
Experienced futures trader Bruss Bowman provides an excellent example of how to incorporate higher time frame price action into a possible lower-time-frame trade,
Dollar General (DG) provides an excellent price reversal study from 12/11/2012 to 12/12/2012. This price pattern occurs frequently across asset classes and time frames. This strategy and subsequent setups provide a high probability trading environment worthy of study.
After Tuesday 12/11/2012 close, there was a significant probability that DG would trade higher on Wednesday. To determine why let’s start with a daily (macro) chart analysis.
What we know at the end of Tuesday’s trading:
- Price made a two-month consolidation from January to March 2012 in a tight range.
- Price broke out in March for a multi-month run higher, consolidating for several months >46.00 before accelerating higher to >54.00 and the high of the year.
- Price broke the daily ascending trend-line (sharply) in July and entered a long-term, confirmed, daily downtrend with several lower pivot highs and lower pivot lows.
- In the week prior to 12/11/2012, price strongly rejected an attempt to move higher from 48.00, clearly breaking another ascending trend line and multiple areas of inflection line and pivot support.
- Tuesday’s break of the long-term support at 46.00 came on much higher volume and traded in a clean downtrend to the long-term multi-month consolidation at 43.00
The reason for all that preliminary information is that it is all relevant to the probability that DG would reverse on Wednesday, 12/12/2012.
Price had been in a five-six month daily downtrend indicating strong, consistent selling pressure from big money.