How I Stalk My Trades to Find Good Entries (Part 4)

08/12/2010 12:01 am EST

Focus: STRATEGIES

Timothy Morge

President, MarketGeometry.com

Here's an updated market map. Price made an even shallower pullback and then a new high for the move, but note it didn't make it high enough to test the maximum excursion line—the air is generally thin up there. Price had expended all its directional energy on that run up, and when it turned lower, it left a huge open gap lower, followed by a extremely wide range bar that opened on its lows but closed near its highs. Clearly, there were large limit buy entry orders when price fell in a near-vertical fashion after the gap.

chart

Click to Enlarge

Remember, traders (especially large traders) love to push price to fill an open gap, especially if they can sense the crowd is caught leaning the wrong way. And after that huge open gap lower, followed by an even larger gap open lower, there were no mid-sized or smaller traders long this market. Many had been stopped out of their long positions at very painful prices and some had even gone short after the open gap. Only the whales were left to buy this market. If they were long, they were adding at these lower levels. If they missed the original run higher, price was approaching the area where price would most likely run out of downside directional energy. You can see where I added in what I consider to be the change in direction line. Until price begins to form mature market structure below this line, price was swinging, and swinging wildly, but it was still making higher highs and staying above key swing lows.

chart

Click to Enlarge

Price turned just about where it should have turned. Could you have entered there? There were many reasons to expect a turn in that area, but the size of the stops and the wild last vertical fall may have kept many savvy traders from taking this trade—at least close to the bone, right at the C pivot of the blue, up-sloping lower Median Line parallel. But the whales were buying there, and you can see they immediately began “pulling the string” on any traders that attempted to go short this market prematurely—because price was still above the change in behavior Line.

Do you think price is headed higher from here? Do you think price is going to continue to trade in a range now?

Do you think price will plunge and break through the change in behavior line, leaving the whales stranded?

More tomorrow in Part 5…

By Timothy Morge of MarketGeometry.com

Related Articles on STRATEGIES