Thursday, February 9, 2012

Trend termination (TT): Double Top


The first pullback in a new trend is usually the deepest and the following pullbacks get shallower. As pullbacks get shallower, they attract fewer new buyers since profitability of buying a pullback is proportional to the depth.

Eventually, the pullbacks are so shallow (b52, b58) that they do not find buyers and early buyers will exit near the high. This will lead to a double top or double bottom and terminate the trend.

Since this is a termination and not a trend reversal, you would need to wait for a new trend to break out before entering a new trade or only trade fBOs.

7 comments:

  1. Straight forward and practical tip that I can use to read the market Thanks.

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  2. Hi Cad,

    Do you see the move from b28 as spike and channel?

    Thanks

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    Replies
    1. It could be a small spike and channel but for trading purposes, you would need a spike that breaks out of something.

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  3. Cad,
    Is b49 an acceptable short?
    Thanks.

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    Replies
    1. because of the excessive overlaps with prior bars, I would not short it. A trend termination is an indication to get out and stay out. A reversal is an indication to go reverse and go short.

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  4. Hi cadaver,

    could be b3 considered as fBO, which reverse HOY and close price, with EMA support or is better wait for second entry long or in this moment (b3) is bear case more stronger then bull (and why)?

    Thank you very much for your reply.

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    Replies
    1. b3 is most definitely an fBO. The signal bar was a doji, but being at the ema gave it some strength. However, since the bear bar was a very strong trend bar, you would need a strong bull bar or second attempt for high probability. If b2 had a weak close or b3 had a 2t body and did not have an upper tick or if it was a bull bar, I would probably take the risk and entered above it but with the realization that I may need to reverse if I get a 1PB short.

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