The monthly S&P500 Emini futures candlestick chart has not had a pullback in 14 months. This has...
Using Simple Box Formations for Big Trading Profits (Part 2)
08/03/2010 12:01 am EST
Let your eyes go back to the lowest point on the chart, the (now) major swing low. Erase all the price action to the right of this low from your mind and imagine this bar unfolding in front of you in real time.
What are the market positions of the mid to smaller players? Which way are they leaning?
As the bar unfolds that will eventually prove to be a significant low, mid to small traders may have tried to hold long positions on the way down at several areas of assumed support, but unless they never use stops and have unlimited capital in their accounts, they have either been stopped out of their long positions or they are now short.
This is the perfect time for the larger traders, the whales, to “pull the string” on these traders and begin buying with both hands to see how far the mid to smaller traders will reach to chase the market higher. When price approaches the lower multi-pivot line from below, the whales are not leaving limit sell entry orders; they are still busy pushing price higher, running the stops of the mid to smaller traders as price continues to climb. The buying does eventually slow, and now if you look closely, you can spot whale tracks.
Can you see them?
Price made a 'V' bottom and then broke above the lower multi-pivot line. Once the buying slowed, price came back to test that same lower multi-pivot line from above, but look at price bounce off it. The whales have been pushing the market lower the entire time and now see the mid to smaller traders are out of their long positions, and even see some of them went short on the break to new lows. The whales may have covered a good portion of their short positions on the way down, but they haven't begun to build up sizeable long positions yet. But looking at the price action at the lower multi-pivot line, there appear to be some significant limit buy entry orders at that level.
If you have a large position or are trying to accumulate one, this is where experience pays off. Price expended a great deal of energy testing and breaking through significant levels in near-vertical moves; both the market and traders are short on focus and energy. Experienced traders know that after these types of moves, the market often pauses and trades within a range, so rather than chase price higher, an experienced trader will watch the price action and see that price has once again doubled the range, with the lower multi-pivot line being the center line, a horizontal line drawn off the major swing low being the action line, and the top of the current range being the reaction line. Once again, we have Newton's “As above, so below.” The whales who still have some short positions left from much higher levels, or the whales attempting to build large long positions don't rush into the market and chase it higher; instead, they put in orders around the center line, the lower multi-pivot line, and let price come to them as it trades almost lazily for quite some time.
But price can't trade within this narrow range forever. Do you see any signs it will break to the downside and continue the trend lower? Do you see any signs the recent major low was a significant low and price will now break out of the current congestion to the upside?
Frame the two possibilities in your mind and try to imagine what it will take for price to break to the downside or to the upside. If it helps, print out the chart and draw in the two possibilities. Practice anticipating the movement of price—not to trade in front of it, but to help prepare yourself so you are ready to act once price makes its move.
Price dances around the middle multi-pivot line. It isn't making a great deal of progress above the line, yet it is unable to fill the open gap below the market—a sign of significant strength. It's a sloppy formation, yet if you look carefully at the last few bars on the chart, you can see that price tried to enter the open gap and failed; on the last bar of the chart, price gapped open higher and traded higher. Price trades as if there are significant limit buy orders at the top of the prior open gap.
Are these whale tracks? Does price action like this speak to you as clearly as if you could see the orders left by the larger players?
More tomorrow in Part 3…By Tim Morge of MarketGeometry.com
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