This lesson explains why most folks stay away from consolidations and chase momentum.
There are great rewards awaiting for those that understand the interaction between price and the trend on different time frames.
It looks hard but once you see how the next bigger
time frame affects the next lower TF. The technical picture becomes more
clear.
It could be the 15 minute chart affecting the 5 minute chart, it applies to all time frames.
The
resolution of triangles (symmetrical, ascending or descending) IMO Is
the best way to analyze price action inside congestion.
The monthly chart is just as important, I'll post an in depth analysis if I get some requests.
Grab a cup of coffee it will get????
If you are not familiar with trend pivot formation read this first:
http://chalannn.blogspot.com/2012/08/pivot-formation.html
1.The daily chart is in a downtrend judging by price being under its declining 20 MA.
2. A big bottoming tail forms on both the weekly and daily charts, after that, the bulls were unable to keep price moving higher, although the weekly chart overall is in an uptrend but in the middle of a very deep pullback (basically neutral) Thus needing more time to fix itself with a longer consolidation.
Back to the daily chart inside the now trend less state, sellers push price back down to.
3. Test the big Bottoming tail (#2) the selling stops again, price has a tepid bounce that forms a LHP And sends price lower again closing below the higher low, now has a lower low, this stock looks like it will continue going lower if it closes below #2
4. A higher opening gap closed above the first lower high pivot (LHP) And the next bar closed above the next pivot and big area of resistance, this stock is ready to re-establish it uptrend, it needs one more higher high low and one more higher high.
Back to the weekly chart: All the action described above forms a bullish engulfing bar on the weekly chart, that green bar completes the HLP. But price is near resistance, that resistance stops price, forms a lower high pivot LHP. Sending price lower, thus the hard pullback on the daily chart after a brief consolidation.
5. Remember that for the larger time frame to move higher the next lower time frame needs to move higher first, on this case the daily chart forms a higher low and begins to move higher thus forming a HL. On the weekly chart, this is your first signal that price is moving higher in both time frames.
Because the weekly chart has no clear trend after that hard pullback from its highs, once the tepid bounce forms a LHP. Gets established the odds are high of lower lows but if the buyers step in and form a double bottom or HL. Now the odds are high that price will move higher. (Each side is always testing each other, leaving footprints behind AKA Trend pivots)
6. On the daily chart price moves higher to that little area of resistance where price stops and goes lower in a controlled way and stops above its rising 20 and 40 MA. And on cluster support.
7. Forms a HLP (cup and handle pattern) Sending price higher to close above the double top.
After a long consolidation the bears try one more push lower but the HLP. Bounced price back, by the end of that day price closed above its rising 20 MA. With a bottoming tail, now the direction was clear for all to see.
8. On the weekly chart price closed above its lower high pivot but near resistance.
1. Once price tests weekly resistance, it gives the chance to longs trapped before the hard drop to get out at break even and they take it, sending price lower, the pullback on the daily chart gets deep because the weekly chart is controlling this pullback, meaning that price will stop on support on the weekly chart.
2. Price finds support #3.
4. Will price fall down to the next lower support area? Anything is possible.
Count how many higher lows and higher highs it has on the weekly chart? If you said it has two higher lows and one higher high, you are correct. It only needs another higher high to try to re establish its uptrend. The bulls are not going to give up that easily. The odds favor another leg higher because it's transitioning from sideways to uptrend.
1. Time for a test. On the first chart how was the double top (#6) on the daily chart resolved? How do you think the double top on the weekly chart (chart above) will be resolved if the pullback is controlled?
2. Same thing happens (cup and handle pattern) on the weekly chart, seen through the daily chart, price moves below the big bottoming tail thus taking all stops immediately finding buyers, next day crating a bullish engulfing bar and consolidates next 10 days.
Will that Bottoming tail create the set up bar on the weekly chart? Do you see where I'm going with this? On the daily chart for the next 10 days price just consolidates but the weekly chart is forming a?
3. On the weekly chart price keeps moving away from the set up bar after a small consolidation, seen through the daily chart forms a HL (blue circle) is the entry signal anticipating that the HLP. On the weekly chart will complete and price will begin its next leg higher? Because it has two higher lows and one higher high this next leg higher could be the next higher high. The risk reward scenario says it is a valid entry.
4. Price completes the second higher high. Now the uptrend gets established.
5. The weekly chart is getting extended and needs to rest if the bulls want to keep it moving higher.
1. After the extended move higher price consolidates for two weeks, the odds are high that it needs a pullback on its weekly chart. On the daily chart a violent drop gets bought by folks buying the dip, turns into a bottoming tail and HLP. That HLP Above its rising 20 MA. Signal higher prices if not violated..
2. On the test of the HLP. And R20 MA. Price forms a double bottom that ignites a powerful breakout but its weekly chart remains even more extended.
3. Next day a monster bearish engulfing bar traps many longs, forcing massive selling, inflicting a big technical damage to the uptrend.
4. Bearish consolidation at the bottom of the monster red bar forms a LHP. And the shorts take over.
How often does the weekly chart trades under obvious support takes stops only to form a higher low pivot and keep moving higher? Very often,
Take a look at the weekly charts of the SPY, QQQ And IWM On the third week in January 2014 and ask yourself what is set up that is forming?
Or just look at the same time frame all 2013 and look for the HLP and the upward continuations that followed.
Large moves ignite and keep going this way as long as the weekly chart is in an uptrend and rested.
The main points to take IMO.
1: In an uptrend or anticipating an uptrend once resistance gets tested it sends price lower but if the pullback is controlled the next surge will overcome that resistance thus the popularity of the cup and handle pattern.
2: in an uptrend or anticipating an uptrend, when you see that the formation of a HLP. Only needs one more bar to be completed, if price is near the set up bar and you enter long, place your stop under the set up bar because the risk reward is enormously on your favor.
3 Use both time frames to identify the hidden money making clues.
It looks hard but once you see how the next bigger time frame affects the next lower TF. The technical picture becomes more clear.
It could be the 15 minute chart affecting the 5 minute chart. It applies to all time frames.
Lesson #7: http://chalannn.blogspot.com/2014/01/the-monthly-chart.html
There are in more depth lesson on the first posts.
Feel free to leave a comment.
All charts are source: www.eSignal.com
Think about this: You started your trading carrier with 100K, without the proper education, experience, trading plan and mind set. After all you heard that the markets exist to make everyone rich, by the time you learned the opposite is true and how to be consistently profitable you lost 50K.
Now you have a trading plan, you are following it and you make good money every week.
What percentage of what is left of your account do you need to gain to be back at break even? That's right 100%. So you lost 50% and you need to double what's left of your money to have back your 100K.
Do you really want to keep losing your hard earned money while you learn?
If you're not making money consistently stop trading and paper trade until you can prove to yourself that you can earn at least 100$ a day consistently and then increase your risk/ reward.
On this lesson I'll review how to use the 60 minute chart to find entry when the pullback on the weekly chart has ended and signaling that is ready to begin the next leg higher.
Inside said pullback both the daily and 60 minute charts will be in a clear downtrend,
as soon as the 60 minute chart begins forming higher lows and higher highs the daily chart will begin forming narrow body days and as soon as the 60 minute chart establishes its uptrend and continues moving higher, both the daily and weekly chart will begin moving higher.
1. The 60 minute chart is in a clear downtrend, price is under its declining 20 MA.
2.
The daily chart was in a very strong uptrend, notice the separation of
price and the angle of its rising 20 MA. Had a controlled pullback,
formed a higher low pivot (HLP) that Sent price higher but stopped
under its rising 200 MA. It Formed a lower high pivot (LHP) Putting the
uptrend in question, price moved lower.
3. Price closed under the first HLP. (purple arrow to the left) And rising 20 MA. Forming the first lower low (LL).
Next
day price opened lower and buyers immediately stepped in, near its rising 40 MA. Sending
price higher. Now it has 1 lower high (LH) and 1 lower low (LL). That
tells you that the daily chart lost its uptrend, now price is in a trend less
state but with bias to move lower or trend in transition from uptrend to sideways to downtrend?
The weekly chart had a multiple week bounce that retraced 100% the previous drop but had reached a previous pivot top resistance, that needed a pullback because it was in a downtrend judging by the declining 10 MA. If that pullback was violent price could make new lows but it said pullback was shallow it could eventually lead to another move
higher. Of note: If you notice the LH Pivots on the daily chart were forming at the top of each descending candle on the weekly chart.
4. Now that it lost its uptrend on the daily chart, trend traders usually move on to other clearly trending stocks, the bounce looks noticeably weaker as price began forming another lower high pivot LHP Above its rising 20 MA. Sending price lower.
It's beginning to look like price action is forming a descending channel.
5. Price stops barely above the lower low pivot #3. I call this the critical area in the chart (The place to enter long if the weekly chart is signaling a move higher because the risk reward is very favorable for the speculator eerrr investor) Because a downtrend needs two lower highs and two lower lows to establish, count the lower highs and the lower lows and ask yourself why price did not closed below the lower lower pivot at #3? And why it formed quasi bottoming tail losing all selling momentum?
6. The weekly chart is in a downtrend BUT.
7. Again the technical bounce it had, retraced 100% the previous decline, that is very bullish or very positive for the longs if the pullback is shallow as this one was.
8. All that activity you see on the daily chart is only a controlled pullback on the weekly chart, now if you look carefully an inverted head and shoulders pattern is beginning to emerge.
Should you go long on the possibility that the big funds will defend that area on the daily chart, or based on the assumption that the big funds are seeing the inverted H&S forming with little resistance overhead?
There is no guarantee that they'll defend that area, but if you get the right signals and you take the trade, your risk reward is better down here than near the top or anywhere else.
Looking for the right signals...............
1. The 60 minute chart formed a double bottom.
First signal: Shorts and sellers were unable to continue the wave lower on this time frame.
2. Price entered an uptrend inside the square. 2 HLs And 2 HHs. Algos buy the controlled pullback in a confirmed uptrend.
Second signal: an up trending 60 minute chart moves the daily chart higher
3. On the daily chart the lower low pivot gets tested again and forms a double bottom higher low sending price higher.
Third signal: The shorts were unable to continue the wave lower on the daily chart as the result of the HL Mentioned on #2.
4. On the daily chart price closed above the first LHP. And broke through the top of the descending channel line. The odds are high that the double bottom is the low and the pullback will be controlled
5. On the weekly chart price formed a green bar above the now rising 10 MA. Confirming the anticipation of the inverted H&S. Projecting higher.
The daily chart had the controlled pullback enough to form a set up bar to pivot higher, then price proceeded to move higher closing above the first higher high pivot and it is now in an uptrend as it has 2 higher lows and 2 higher highs.
However price is fast approaching a double top on its weekly chart.
A week later price went lower because of that double top on its weekly chart had too much resistance that had to be absorbed for a few weeks.
The first sign of trouble for the longs or price reversing was when the 60 minute chart formed a 2X Top with the biggest red bar putting the uptrend in question, then formed the 1st LH Pivot with price still above its rising 20 MA. Price kept pivoting lower, then fell under its declining 20 MA. And the new downtrend began, that action kept moving the daily chart lower.
That is why swing trading longs work better on weekly charts inside an uptrend with zero resistance, reads new highs every time.
Some swing longs can last for weeks and some only few days.
As long as you understand where resistance is on the weekly chart, because the odds are very high that price will stop to rest, form a pivot higher or reverse in a controlled way to form a higher low pivot from an slightly lower area (Sort of a cup and handle pattern), we never know the severity of the pullback only that the smaller time frame will always signal when the larger TF Will begin moving.
Ideally
for this strategy to work the weekly chart has
to be ready to bounce higher and have no clear resistance like a
rounding top or other obvious signs of trapped longs overhead as
shown on the chart below #3, the weekly chart is in an uptrend taking a
breather, having a controlled pullback, whenever is ready to cycle
higher or form a HL Pivot,
both
the daily and 60 minute charts can very easily be in a confirmed
downtrend (DT) # 2 ( Price on the daily chart was inside a descending
channel) And both need at least a double bottom or a HL First to signal
to future buyers that the time for reversal is fast approaching, even
better if the trend violently changes as was the case on the 60 minute
chart of FB (on red and blue) #1 to signal to future
buyers waiting on the sidelines that the sellers are exhausting and
buyers are getting control of price, this is where
the 60 minute chart and faster TF. Mind you, sends the most important
signal by being in a DT. Once the HL Forms puts the DT In question and
the whole cycle higher begins to form because the weekly chart has
pulled back enough and needs to begin its next cycle higher.
For that the 60 minute chart needs to establish an uptrend or form 2 HHs And 2 HHs
#1
Entering into an uptrend first was necessity to get the daily
chart moving higher, as the uptrend continued on the 60 minute chart the
daily chart retraced 100% the last drop and consolidated for three days
giving time to the weekly chart to close with a bottoming tail set up
bar to form the HLP And continue moving much higher as the next up cycle
on the weekly chart took control of price as seen in the
chart below.
As long as the 60
minute chart remains in an uptrend (UT) The daily and weekly charts will
keep moving higher, if the weekly is in an UT With zero resistance, even
better.
Think of it as the starter of a car gets turned on to start you car's engine. that is the 60 minute chart to daily and the weekly charts.
As long as the 60 minute chart remains in an uptrend (UT) The daily and weekly charts will keep moving higher, if the weekly is in an UT With zero resistance, even better.
This technique is excellent to ID Tops on the weekly chart and find low risk short entry on the 60 minute chart, go to my time frame cycle lesson below for more.
Lesson 7 Much, much more on the influence the weekly chart has over the smaller time frames: http://chalannn.blogspot.com/2012/09/using-weekly-chart-to-make-sense-of.html
Sounds complicated but is not. this lesson goes in more detail: http://chalannn.blogspot.com/2012/08/time-frame-cycles-from-monthly-to-15.html
Read this four links to understand the influence the monthly chart has over the rest of smaller time frames:
http://chalannn.blogspot.com/2014/01/the-monthly-chart.html
http://chalannn.blogspot.com/2014/01/the-monthly-chart-ii.html
http://chalannn.blogspot.com/2014/01/the-monthly-chart-iii.html
http://chalannn.blogspot.com/2014/02/revisiting-some-monthly-charts.html
See how easy it is?
If you need to read the anatomy of a trend click here: http://chalannn.blogspot.com/2012/08/trend-analysis-using-pivots.html
Feel free to leave a comment.
A
ll charts are source: www.eSignal.com
