How I Stalk My Trades to Find Good Entries (Part 3)
08/11/2010 12:01 am EST
Price fails to trade above the major swing high. After failing, it turns back lower, but the green, down-sloping line that had been resistance now acts as support, and after a few quiet bars, price turns back higher again. I call these areas that switch allegiance “switchbacks” and they are quite useful once you get used to looking for them. They often give you further important clues on your market map—clues most traders do not have.
If price manages to break above the prior major swing high, we will have seen a change in behavior and should be wondering if price has already begun a new uptrend. Should this happen, we'll have to completely revise our market map.
Price does climb above the major swing high, so I completely revise my market map. I mark the pendulum swing pullbacks (note the second pullback is not as deep as the first pullback) and then I connect the lows and highs of the first and second swings higher to make them easier to see.
Now let me show you something I haven't marked on a chart shown publicly before: When price makes these pendulum pullbacks that are easy to spot, connect the extremes generated by the first two pullbacks with a simple trend line and project it out in space. This line marks just how far price is rocketed higher by the “slingshot effect” once the cocked pendulum is released. Because the lengths of the pendulum pullbacks and the swings following them are not equidistant, the line has a slope. This sloped line shows the maximum excursion away from the swing lows, and by connecting the first two extremes, we often get a very accurate measurement of where price will run out of upside directional energy.
More tomorrow in Part 4…By Tim Morge of MarketGeometry.com