Tuesday, May 10, 2011

The channel open

When the market opens and right away starts moving with overlapping bars with very small or no pullbacks below the previous bar, its opening into a channel. A channel move is simply a trend bar on a larger timeframe and usually there will be a second leg up if the channel breaks and moves sideways. A channel move should never be faded unless the channel gives an obnoxious overshoot.

Channels usually terminate into poorly formed double top or double bottom formations or a doji bar or both (b14). If the channel only pulls back part of the way, say 50%, there is a very good chance there will be a comparable move in the original direction later in the day. You should look to enter on a G2 if you get a deep pullback.

Often the pullback after the channel can go horizontal into a trading range if the channel gave a trend termination sign such as an ii (b13), DT (b14) or doji (also b14). Swing traders should wait for a breakout at this point and today we got a DP (b45), which is a trend generator.

A DP should be expected to give a BP on the other end of the trading range and can be held for a swing till  the measured move of the trading range is hit or another trend termination signal (b72).

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