The monthly S&P500 Emini futures candlestick chart has not had a pullback in 14 months. This has...
How a Professional Builds a Case for Entering a Trade (Part 5)
09/03/2010 12:01 am EST
Just imagine how excited all of you are when Major Swing Highs and Lows are finally broken! Your heart speeds up, and if you are already on board for the move, you aren't thinking about taking profit; you're thinking about “The Big One” that is just starting to gain momentum. And if you aren't on board, you are so caught up in the moment that you have to find a way to catch a part of this move, because it's broken the Major Swing, so this has to be the beginning of The Big One. Trading Plan? Market Context? Market Structure? Who has time for those things? As Carl says, everyone is shouting, “Oh My God, they just took out the lows!”
The smart Whale says…wait, I should let Carl finish his Whale tale...
As the selling dries up, the smart Whale calls every market maker he can and buys everything he can; they are happy he called, because they are sitting on huge long positions in a market on its lows. They make the Whale nice prices, nice offers, because they assume the Whale is also calling to sell. The Whale buys more and more and more.
And though price teeters for a bit, suddenly a few of the larger traders figure out what just happened: They aren't long, they are now short at or near the lows and the market has stopped going down.
And when that last wide range bar closes far above the prior Major Swing Low, those few savvy traders get a sick feeling in their stomachs: They've been taken for a ride on a Whale! The market makers were extremely long at or near the lows and the Whale ate their long positions. The traders who thought the prior Swing Low would hold were stopped out of their long positions, and some of them went short below the prior Major Swing Lows. And of course, the breakout traders are short at terrible levels below the prior Major Swing Lows.
One by one, it begins to dawn on all the traders, small and large: “Someone just stole all the longs!”
Carl says, “Price chasers.” This formation is formed by the lucky few who recognize a “wash and rinse” that was just executed extremely well by a very large Whale, and so they cover their short positions immediately. If a Whale is feeding down here and he is able to control this market this well, the smart players get out of the way.
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And the Whale? He had to make certain all the long positions were gone, and just as important, all the interest in playing from the long side was gone. These plays work best when you can make it look—for a short moment in time—like only a fool would try to step in front of this train! But when the fool engineered the whole move and is able to build his long position while everyone else is getting ready for the big move lower, he doesn't want anyone else to be long.
Can you guess why? You've all seen this before, and many of you have been caught in this train wreck and wondered afterwards what hit you. Why would the Whale want to be the only one long when the market looks so absolutely terrible?
The last bar on this chart says it all: When price breaks out of the congestion and closes above the range that had built up just above the prior Major Swing Low, every trader suddenly understands. As Carl says, “Oops!”
Remember, Carl was short from a beautiful level and he wasn't greedy. As price approached the prior Major Swing Lows, Carl took his money and then took a walk. That was the area he identified when he framed his trade as an area to logically take his profits. And he didn't jump up or do handstands; he followed his trading plan.
But most of the market got caught up in the moment and went with it! Now, none of them are long, and as price breaks above the top of this range, they have to begin covering their short positions no matter where they entered. If you look at this chart now, it's clear the prior Major Lows held.
If it isn't clear to you, push your chair back three or four feet and look again. No wait, let Carl finish it for you...
“Everything holding the market down before now means nothing and gets zoomed,” says Carl. And he is exactly right. Look closely and you'll see that when the bar breaks above the range just above the prior major Swing Low, the short game is over. And the doorway out is suddenly very small!
The Whale wants to be the only one long because then more traders will have to chase price higher once they recognize the Change in Behavior. Most of them will grumble and moan about being washed and rinsed, but their own greed and poor preparation did them in. If you take the time to make a quality market map, wait patiently for your trade, plan and frame it, and then follow the plan, you will be taking your relaxing stroll or getting a drink of green tea when these events take place—unless you are the Whale. Then you will be very busy.
I can't thank Carl enough for such a gorgeous example of an actual trade that has so much going for it, and a set of images so many of you should study over and over. Please consider starting to keep trading plans before you trade. Start making market maps, paying attention to Market Structure and Market Context, and then stick with your trading plans. Don't get caught up in the moment chasing price at its extremes. Plan your trade and trade your plan!
We teach these things in every session at Market Geometry and we highlight Whale tracks. Remember, you don't have to be a Whale to play along. If you can read Market Structure and Context and know how to read the markets like a Whale, you can spot the tracks and trade right along with them!
I hope you found this beautiful set of images interesting and informative. I hope my commentary did Carl's gorgeous market map and his wonderful trade justice. And most of all, I hope some of you learned a little about how Whales think and trade and will start thinking about how not to be fish food at these critical levels.
"Master Your Tools, Master Yourself."®By Timothy Morge, president and founder, MarketGeometry.com
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