Tuesday, January 18, 2011

Consolidation and breakout

While today's first bar was the ideal size (2 points for an average 10 point day) with only 1t on each end, the fact that it occurred without any gap from Friday was good reason to believe this was a trading range bar. A good bear bar near its top would be a good short candidate and a possible 1st reversal. However, we got a doji inside bar after a bull bar and while this works, there's a good chance that there could be a higher low that does not give a scalp profit so the right decision is to pass on the trade and wait for a higher low or a break below the bar and a possible reversal up.

The down up reversal at b6 is a first reversal and should be taken. this should be good till the hod at least. Since this is down up reversal and not an inside bar trade, the entry is above the bull bar. The almost outside up entry bar of b7 gives a possible move to 1291.50.

b10-b12 is a ii variant final flag and could lead to a move down. However, we are expecting a first pullback after a first reversal and folks who want to go long may skip the short trade and take a two legged higher low for a swing.

b17 was a gap bar and a two legged pullback to a higher low and is the best swing option for the day. This should attempt to break above the HOD and try to get a measured move of the pullback, that is 1294.75.

The move to b37 was a 2 legged poorly formed A2 signal and a rather shallow pullback. This is a TTR  consolidation and its perfectly fine to get out at this point and wait for the market to breakout.

The market moved to b61 as a poorly formed W and gave a reversal bar exactly at the b7 measured move. This reversal bar did not trigger, which was a bullish signal and shorts are best avoided at this point since there are no signs of bearish strength yet.

While I normally buy above bullish bars, b70 was a small bear bar that had lots going for it. A 2 legged pullback after a breakout at b61, an overshoot of the pullback trendline, breakout test of the A2 signal at b37 and the first trendline break. However, it was perfectly acceptable to buy above the shaved bar b71 or b78 breakout pullback and hold till the measured moves were met or end of day.

The day ended at 1295, 1t above the measured moves of the first pullback and the final trading range.

A triangle is a sign of consolidation and many traders exit their positions since a triangle could breakout either way although usually along the previous trend.

The poor reversal bars at b50 and b61 along with the generally strong trend indicated a bullish breakout and bullish breakouts usually occur after pullbacks such as the two legged pullback to b70.

Its important to note the examples of failed breakouts today. b2 broke above and failed giving a trend move to the other end of the range. b10 gave a 2 legged pullback, giving a long trade. b50 and b61 were  failed breakouts that did not generate a trade since the breakout bar did not generate a signal or trigger.

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