Lessons in Price Action – One shot, one kill
I had planned to make todays post a continuation of the system building, but we have an excellent risk/reward opportunity in Crude today, and there are some subtle clues it is worth investigating.
What story is the tape telling us?
Once upon a time, there was an epic battle, my institutional trader friend Jehan calls it the “Battle of the shales and sheiks”.
Like we were talking about yesterday, trading ranges end when participants are so exhausted or bored they give up. A useful proxy for “we are in a trading range” for system building is 20 bars or more of inconclusive bullshit.
This is very handy shorthand. 20 bars from the previous trend, the trend has lost influence and trend continuation goes from being a high probability to a coin flip.
Generally we get a couple of clues as to breakout direction. These clues are from interpreting each bar in the context of what we would expect. The bar I’ve marked as “failure to go up here is bad” is a hammer candle, threatening a breakout. That was a particularly good opportunity to win the day, when breaking out was a very short distance away. Not only was the buying pressure weak, it was so weak it couldn’t even try. Couldn’t even break the candle high. Weak and soft bulls don’t have the energy to land the knockout blow.
We should start to get interested about this point.
What next? The smart play is to buy the bottom of the trading range, because it is a low risk idea. A very small risk for a larger gain. And the three bars off the lows are frankly pathetic. Keep in mind that these are the bars (first few bars off the lows) that will ALWAYS have the strongest and most sensible bulls buying. Look at the previous downside breakouts, bulls reliably stepped in to push it hard off the lows.
Look at this bounce. Not a chance. At this point, we have the odds all lined up in our favour at the time to bet is at hand.
So how do we play things when we see price action like this? We look for a point which confirms our view, and get in when price crosses that line. For trend following setups it is (mostly) better to let price confirm by moving in your direction first. Here I got short on a break of the lows, with a stop at the candle high. You can see I banked half at 2R and half at 4R.
But the past is the past. We banked and yanked and now it’s time to consider a fresh shorting opportunity.
What are the best trades? In downtrends you should be shorting rallies that fail.
Here we have had some clues that the bulls were going to mount a rally. If that rally gains legs, we probably see a short squeeze. If it fails, the rally has failed and the bulls who bought in the last 4 days will be forced to sell, driving the market lower.
Today is the critical day. We have a failed attempt to drive the market up. Right now the bulls can still make a tentative case, but if the bears win here, the bull argument will literally sound silly.
These are the points we wait for as traders. The point of inflection (Mole’s term) where one side or the other is forced to admit defeat. Go short if price breaks the daily low, with a stop just above the high. 50% odds of a big win. Betting odds.
As far as the indexes go. I remain convinced the rally stinks and will likely fail before the old highs, but we get more information today. If the bulls are strong enough to break out, then we really should have strong buying pressure off the open today. Otherwise the door is open for the bears, just a little. We certainly don’t have betting odds yet so this is all rather interesting but keep your powder dry.