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 chart above has the weekly and daily charts of SGMO. Of note I will differentiate the set up bar with a single purple line, the completed pivot will have a purple arrow.
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.
The chart above shows you two different set up bars and two HLPs on the daily chart.
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.
Even the 60 minute chart was entering a downtrend as shown on this new chart. The next day was a Friday, price jumped higher turning the small red candle on the weekly chart into a green bottoming tail but more importantly giving clues that no breakdown was taking place on the daily chart, the next daily candle on Monday coincided with the breakout on the weekly chart into an area of little resistance following the small rest (thus the giant up move the following days) and confirming that the pullback two days earlier seen on the daily chart was to pivot higher.
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.
This chart of DGAZ Gave me some clues that price was going to possibly form a HLP. On its daily chart, it had a potent bounce with very heavy volume from the test of the first bottom, the three days indicated with the thin purple line were the last three days of the week, the pullback on those days was very small and it needed a setup bar I thought.
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 next chart is the weekly, daily and 60 minute charts of GOGO. I'll keep it simple, referring only to the daily and 60 minute charts the rest of the lesson.
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 next day price ignited another move higher as was indicated by the bullish consolidation on the 60 minute chart the day before.
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.
Same action on the SPY:
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
This is part II of the lesson I begun last week about using different
techniques and tools to identify low risk/ high reward areas of entry
way outside of an established trend.
Click here for the part I: http://chalannn.blogspot.com/2014/02/finding-entries-outside-established.html
To be clear most of these examples had some help from
their weekly charts being in an uptrend or had violent drops exhausting all selling.
Some examples
will be more art than science, the idea is to identify long trades when
the markets seem to be offering zero long trades inside panic or the
patterns on the monthly and weekly charts don't support your bullish
bias yet stocks bounce and even retrace back 100% Their big drops as was
the case during the first half of February 2014, This lesson was
inspired after analyzing how the SPY Was able to bounce inside an area
of no clear support, retracing nearly 6% and what clues did it offer to
identify future opportunities.
One very critical concept one (you, me) must understand and believe is that as an strictly technical analyst, fundamental analysis means little until it does, in 2012 AAPL Had a power up move that has being analyzed on the lesson: the monthly chart part II.
During the length of said up move, some times it had controlled and some times it had violent pullbacks and every time AAPL Kept pivoting higher as it was making new all time highs during all that time so it needed to form its own support in areas where was none, either in the form of 2X bottoms, higher low pivots, etc. And kept moving higher until it reached 700$.
Because AAPL Had a solid fundamental reason to move higher as it was introducing great products and such, I guess.
In 2013 Stocks like VJET, DDD, ONVO To name a few had parabolic moves on pure speculation and dropped,
In the year if our Lord 2014 They haven't being able to go back to their highs seen in 2013 so I gather all three had no fundamental reason for their parabolic move.
Basically strong stocks and ETFs create their own support where there is visible none in the charts so pay attention to 2X bottoms, W bottoms, 3X bottoms, higher lows, higher opening gaps, breakdown failures that trap the shorts, long bearish consolidations that fail to breakdown, or any other signal that obviously interrupts the down trending cycle on the time frame your looking at, in this case the daily chart.
I
separated and highlighted the Fibonacci grid into three zones, be VERY
AWARE that the deeper price falls inside these grids, the more price will need
to form longer bases to bounce back to the highs. The
upper 37% I call it the green zone to look for entries, the smaller the
drop the better to continue moving higher as it shows no sellers.
The next lower level 26% or from 63% to 37% I
call it the yellow zone, where one can find entries but some hard
evidence of price reversing is necessary such as multiple narrow
bodies following a big drop or a clear double bottom signaling the possibility of price moving back to the top.
The last level under
37% to 0. I Call it the red zone and chances are low of finding long trade entries
unless supported by big support on the bigger time frames TFs, multiple
narrow bodies following a big bar or a clear double bottom.
The chart above displays three different time frames of the SPY.
I separated the time progression of price on a blue box of a whole week of action from the weekly, daily and 60 minute charts during a 15 day period.
On the top half of the chart, the weekly chart had a violent drop but was still far from support on the higher low pivot HLP. Or any other type of support to bounce from.
On the following week's action as seen outside the blue box it tested the HLP. Support.
It was one big drop as seen on the 60 minute chart where I laid a Fib. Grid the size of that drop, price begun to form a base on the red zone but wasn't enough to send price higher because first the bounce was weak, second it was only the third day of the new week and the weekly candle was forming a red narrow candle following a big red one, it was signaling that volatility was ending but not ready to bounce back to the top.
Remember that the bigger the drop the longer the base needs to be from where to bounce, most of the times.
On 60B It shows the whole five days through the 60 minute chart where price consolidated but couldn't trigger a bounce higher, the weekly chart kept weighing heavily following the resting period because the HLP. Support wasn't enough to bounce price higher causing another drop to find bigger support.
On the 60 minute chart I laid a Fib. Grid the size of the first drop once price rolled lower again to get some clues on the strength of the selling, price stopped going lower right at the 100% mark of the size of the first drop.
On 60C Price stabilized again, it had a weak bounce, formed a lower high only to form a LHP. To move lower again where I laid yet another Fib. Grid the size of the first drop starting at the lower high, but this time price on the green zone formed a double bottom.
Ask yourself why did price stopped going lower at such a shallow level in the fib. Grid compared to the other two big drops and what is that stoppage of the waving lower signaling and should you be getting in?
Price begun to move higher with more conviction, once price cleared the LHP. Area it had no resistance above, it bounced all the way to the top, retracing 100% The big drop turning the candle on the weekly chart into a big bottoming reversing tail.
On the top half of the next chart it shows the continuation of the potent bounce, I moved the Fib. Grid that I had just recently lowered to measured the strength of the bounce and price kept moving higher.
Why three green zones on that Fib. Grid? Because it was an oversold bounce into an area of zero resistance.
On the lower half of the chart I moved higher the same size Fib. Grid, once the second drop was retraced 100% Because on the first day of the new candle on the weekly chart there was no pullback just a very tight consolation (red asterisk seen on the 60 and daily charts) as price was about to enter another area of zero resistance above.
Four days later it retraced nearly 100% the first big drop, The lower gap opening that was immediately bought forced a shakeout of weak hands and released some overbought pressure IMO.
I told you, a very strange way of using Fib. Grids where some times the red zones turns into green zones if price begins to behave out of the normal wave forming behavior.
Should one always buy double bottoms? It depends on your trading plan, they don't work most of the time in a price vacuum, if price is near support on the larger TF. They have much better odds of working as explained in detail on previous lessons.
If you want to speculate on a high risk/ reward trade and you must enter a high risk double bottom, look for entries near the prior lows as much as possible if declining momentum has clearly slowed, with a tight stop to get out in case the big bounce doesn't materialize or worse price forms a LHP. To continue moving lower because the larger TF. It's not ready to move higher.
The chart above shows three time frames for FB. Its weekly chart was in a very strong uptrend but began a pullback to release some overbought pressure, shake some weak hands and to form a HLP. To move higher after a good shake down..
On the daily chart at #1 It shows one last higher opening gap to close the weekly chart with a big green candle, then it begun a ten day big pullback that retraced 100% the up move changing the uptrend to sideways on that TF.
#2 The bounce that followed was 50% the size of the big drop, formed a lower high pivot LHP. And continued moving lower where it closed under the last lower low pivot putting price in transition with bias lower.
Notice that the second drop indicated by the purple lines was smaller that the first drop.
#3 & 4 Shows the 60 minute chart in a downtrend. I laid a Fib. Grid the size of the last drop.
Once price formed a lower low on the daily chart it bounced 50% the size of the last drop to its declining 20 MA. Only to form a second lower high pivot LHP. Sending price lower to test the lows from six days before, where price found some support, consolidated four more days, finally collapsing and closing below the first lower low, thus establishing a new downtrend on that TF.
The purple line #1 Is bigger than #2. Purple line #2 And #3 Are the same size, if price drops to the bottom of the third purple line it will show the same amount of selling than the previous drop.
On the 60 minute chart it showed the same thing, the first drop was from 49.50 to 46$ Then I laid a Fib. Grid the same size of the first drop, from 47 to 43.50$ #4 and #5. Once price reached 100% the size of the first drop price stopped going lower, then had a potent reversal candle as seen above # 5. Right on the spot the third drop on the daily chart had reached 95% the size of the second drop and signaling a decreased on selling pressure.
That potent bounce on the 60 minute chart carried price all the way to the top retracing 100% of the drop, moving price on both the daily and weekly charts higher.
That bounce on the daily chart looked like it was going to stop again at 50% the distance of the last drop near its declining 20 MA. On resistance to form another LHP. And keep waving lower on and on, except that the weekly chart was in an uptrend but having a controlled pullback to pivot higher, it had formed a bottoming tail and possible setup bar on the last bounce on the 60 and daily charts.
#6 Price looked like it was going to begin waving lower again but it broke out higher with a big green bar, moving price further away from the low of the bottoming tail on the weekly chart and confirming the formation of the HLP. On that TF.
Once the HLP. Formed on the weekly chart a new up cycle began sending FB. To new all time highs soon after.
To understand time frame cycles read here:
http://chalannn.blogspot.com/2012/08/time-frame-cycles-from-monthly-to-15.html
I'm not going to bore you more with technicalities but to get an idea of how important it is to guess and anticipate where the next setup bar will form on the daily chart to continue the move higher on the weekly chart I present to you without comment: NUGT
Other than to recommend you to read the lesson on how and why the setup bar and the ensuing trend pivot forms, click the link:
http://chalannn.blogspot.com/2012/08/anatomy-of-trend-pivot-disclaimer.html
If this lesson doesn't make any sense to you, read the first ten 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
