The setup bar comes in many shapes as shown on the chart below, because more than an obvious physical look it's a candlestick that begins to give shape as the middle of a new pivot in the making, price inside the action is very dynamic at least from the 1 to the 60 minute time frames and pivots reinforce the prevailing trend on the larger time frames, daily or weekly charts.
The most solid setup bars look like bottoming tails that continue moving higher, because the weak hands were shaken out during their formation, price will move higher now that most sellers are out.
It forms like this, at the opening of the trading day price drops noticeably hard from a clear small base or after three candle pullback in an uptrend on the daily chart, price completely reverses by the closing day turning the price breakdown from a big red candle into a bottoming tail (it happens in all time frames TFs but the larger the TF. Such as the daily or weekly charts the more relevant it is).
Some setup bars look like big red candles, price bounces next day, the lows of said candle never gets retested and price continues moving higher forming the higher low pivot, the prevailing trend helps you identify the pivot formation. My bread and butter trade from the 15 minute to the weekly chart.
Again, in my opinion the setup bar occurs at the right area in the chart to get rid of weak hands, eventually forming a higher low pivot to begin the next cycle higher (most of the time). Vice versa in a downtrend.
Read and memorize this chart first because it is the main point of the lesson and at the hearth of trend analysis.
To be sure these strategies can be very rewarding but require understanding of price behavior.
We can't buy every stock we see simply because its daily or weekly chart (depending on your time frame of choice) has A TIGHT CONSOLIDATION with the last three candles having none consecutive higher lows to the left of today's candle thus leading us to expect that a setup bar will form and eventually completing a higher low pivot HLP. To send price higher.
For the well seasoned in the market or on this strategy, experience and the charts tells us when we need to enter the stock, even as aggressive as when the setup bar is forming if need be, provided other signals on your check list are aligning such as Fib. Retracements, price on support or the last bar is narrowing after a multiple day pullback, etc, etc.
One clear example is if price is in an uptrend on its daily chart, after forming a base for a while to absorb all the sellers and if the HLP. Forms, the odds are high that a new move higher will begin very soon.
Large pullbacks in an uptrend also form setup bars and HLPs but the dynamics differ compared to a basing process. I'll explain in more detail below.
Once price looks ready to pivot higher the HLP. Formation can be anticipated using these techniques.
Why the need to find where the higher low pivot will form? Because in the ebb and flow of the uptrend you normally see a 100% move higher and a 50% pullback in price, but sometimes price only pulls back 20% and if you sold your position expecting a deeper pullback and you're able to recognize the HLP. Formation you reenter immediately your long position to capitalize on the next move higher placing a stop below the HLP.
Very strong stocks sometimes don't even form clear higher low pivots, you just buy the breakout. But I'm getting into a more advanced topic here.
The blog has countless examples and lessons on how to analyze trend and price behavior.
Based on my trading experience and trading plan I usually wait for the second higher low bar to the right of the setup bar to complete to enter long, the closer price is to the setup bar the more aggressive the entry and higher odds of the trade stopping outs unless you use other strong signals to confirm your bias and urgency such as higher time frames signaling an immediate move higher, etc. Etc.
Even if the higher low pivot completes there is no guarantee that price will move higher, other than higher highs beget higher highs inside the uptrend.
Algos or computer trading programs relay heavily on trend pivot formation amongst other indicators on their technical analysis of price action, I see it and I try to profit from it every day in the markets in all time frames.
The weekly chart shows a big consolidation taking place for the last eight weeks, the HLP. Isn't completed yet but is near completion, the third candle that tests the low of the setup bar is usually the best area to look for entry because if price doesn't break down lower, the pattern signals that price will be moving higher once the HLP. Completes and your risk reward is like 7 to 1. Remember pros buy low and sell high to who?
If one enters on the last test or near the low of the setup bar and price breaks down the loss will be small, like 50 cents small.
The daily chart shows a big price channel, the blue square enclosed three candles because it was only Wednesday when the chart was produced needing two more days for the weekly candle to complete thus the HLP. Formation was still happening.
The green box shows the best entry areas anticipating the big funds defending the future HLP. Being near completion.
As you can see both setups have very different dynamics, the first one is a deep pullback in an uptrend, it requires knowledge of price behavior inside the trend (All that info inside the blog) that said if you know how and where price will reverse to the top, it can be extremely profitable with a small risk if you enter at the right time.
The second pivot formation is no longer in an uptrend but price has lost most of its volatility letting folks enter near the setup bar once the HLP. Looks ready to complete.
Sometimes I get the impression that in an uptrend the only thing price needs to move higher is to trade under some obvious support after basing for a few bars, take some stops (form setup bar) once folks give up on the pattern thinking that it's breaking down price reverses back to the top and takes off higher forming the next HLP.
The daily chart of NUGT Was just absorbing the large move seen on its weekly chart.
The daily chart has a HLP. Formed eight bars ago, price was still holding above that HLP. And was aimlessly basing above its rising 20 MA. Waiting for price to touch said MA. Then price suddenly dropped and took some stops under that quasi base thus touching the 20 MA.
The enclosed 4 candles tells us the the chart was produced on a Thursday.
Basically when price failed to break down it trapped some shorts then triggered a powerful short covering move higher into an area of little resistance.
A: On Monday DGAZ Opened flat and sure enough it dropped enough under the low of the three previous candles immediately bouncing and closing near the high of the day, next day instead of continuing higher it had a lower opening gap forcing some selling enough to send price below Monday's low or B.
On Wednesday price opened flat and tried to test Tuesday's lows but a higher low formed sending price higher and maybe signaling that the setup bar was on Tuesday instead of Monday.
Some times when the setup bar isn't to obvious enough price returns to make a clearer setup bar to pivot higher, will that be the case this time we should see in two more days.
The daily chart stopped its downtrend with a double bottom, the big thick purple lines are the same size indicating that the second move lower was smaller than the first one, signaling that sellers had exhausted and that double bottom confirmed it.
Price bounced for three days indicated by the red asterisk, on the last red day forming a possible lower high setup bar.
The 60 minute chart was trying to establish an uptrend.
The next day price kept dropping under the three day base, the daily chart was no longer in a downtrend, it was just forming a base, it could had very easily tested that double bottom below.
Near the 50% retracement mark of the up move on the daily chart, the hourly chart reversed during the second half of the trading day closing above its opening and forming a possible set up bar on the daily chart.
Sometimes (inside tight bases) as you'll see below, the daily chart begins falling hard looking like it would form a big red breakdown candle by the close but after lunch it reverses all the way back on the hourly chart, closing the daily candle on the green or with a big reversing bottoming tail.
Next day GOGO Had a higher opening gap and buyers jumped on it immediately signaling that the drop the day before was a setup bar to pivot nigher.
On the 60 minute chart the largest up move happened during the first hour and it consolidated that move the rest of the day, usually a sign of little selling and higher price if buyers push at the open next day.
The higher opening gap into an area of no resistance kept the sellers away for one more day, forming a very the big green bar on the daily chart.
All this move began with the formation of the setup bar three days earlier. The biggest point to take out of this example is that the daily chart of GOGO Was trend less and basing when the setup bar signaled the next move higher was coming.
Below are the charts of the IMW And SPY ETFs.
After closing on an all time high the week before, the following Monday both had a lower opening gap due to some bad geopolitical headline.
As seen in the 60 minute charts, the first three hours looked like these two ETFs were going to collapse but the reversal in the last three hours signaled that both were potentially forming a set up bar to pivot higher, after all both were in an uptrend on their daily charts.
Both could had opened the next day with a lower opening gap like the gap lower on DGAZ As shown above, that is what stops are for, if you entered early and the lower opening gap happens the next day, you sell and take a small lose because if the bottoming tail fails to reestablish the balance back to the longs, more selling will follow not only from yesterday's new longs like you but every other long looking for excuses to get out of the markets, specially after a giant
The enclosed red candle on the daily charts shows you the way the daily charts looked during the first three hours, if the daily chart was to continue going lower the 60 minute chart would stop going lower for an hour or so during doldrums, midday or lunch, take a rest and then continue going lower after lunch all the way until the close, forming a big red candle on the daily chart.
But if the hourly chart instead of going lower the last half of the day reverses back to the top the shorts have to be asking themselves is this the setup bar to pivot higher and should I cover? And so should you.
Don't take my word for it, print some charts of tight consolidations and look for the setup bar and the actual trend pivot formation and completion, what happens after that? Take some notes and even if you see potential on these strategies, paper trade them first until you feel comfortable risking your own hard earned money.
The next day after this lesson AAPL Did this and you should recognize it by now.
Lesson #4 Time frame cycles: http://chalannn.blogspot.com/2012/08/time-frame-cycles-from-monthly-to-15.html
If this lesson doesn't make any sense to you, read the first 20 lessons on this blog, because they explain in detail the method I use to analyze any stock in any market.
Feel free to leave a comment.
All charts are source www.FreeStockCharts.com
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