As you look at the chart below, you should be drawing a market map (either in your head or you can literally add the possibilities onto your live chart) that maps out where price may run into resistance. And it's important to decide when projecting that area of resistance just how important that area is. Is it an area where limit entry orders are likely to be waiting? If so, do you want to consider looking for an entry setup for your own account in that area?
Is the area a key to the probable path of price? If price brings the pendulum to this level and this level is a “make or break” area for the trend, you should be deciding what you want to do at this key level:
- If you like the market structure and price action that brought price to this key area, it's a wonderful place to enter for a potential reversion to the trend (if you have a quality entry setup and stop) because your entry will be “close to the bone,” meaning you will have entered well before most traders take positions in the direction of the trend and will most likely have a much better entry price.
- If you don't like the way price headed toward this key level, buy another bar or two, which means watch how price acts when it gets to this area. If price begins to stall at this key level and builds market structure you are more comfortable with, begin looking for a trade entry setup—though these areas often spawn quick turns if price is about to return to the prior trend, so by waiting for more information, you may miss a “close to the bone” entry.
- If you are uncomfortable with the price action that brought price to this key level and you see nothing that relieves that uncomfortable feeling, stay out; don't waste too much of your focus on the market. Wait until you see market structure that you know you can trade successfully before spending time, energy, and money on this market.
On the chart above, I added my market map and marked out what I thought were two key possibilities if price continued higher: 1) Price often doubles a range—even a sloped range—and then returns back to the prior trend; 2) Price often runs into limit entry orders at a multi-pivot line. These orders are left above the current price action by the larger traders (or “Whales”) in a downtrend, in case price pulls back to levels that give them a quality entry on a pendulum-type pullback (and the opposite in an uptrend, of course).
Price gapped open higher, rose to the confluence formed by the multi-pivot line and the down-sloping line that marks the area where price effectively doubled its “sloped range” and then turned lower. To stay within the downtrend, price could only stretch the pendulum back that far; any further would have violated the key market structure. At least for now, market structure and potential limit entry sell orders turned price back toward the downtrend.
The return to the downtrend does not last long. Price consolidates for a few bars, drifting higher and above the down-sloping green line that marks the doubling of the sloped range. Once above this level, price accelerates its climb and when it trades above the multi-pivot line, breakout buyers and stop loss buying propel it even higher. These are the traders chasing price as it moves higher, either by choice or because they must exit their short positions.
There is one last obstacle in price's upward path. Do you see it? And do you think price will have the strength to move above it?
More tomorrow in Part 3…
By Tim Morge of MarketGeometry.com.
