Our sense that the market was running out of time appears to have been ideally timed, and already COMPX / Nasdaq has hit its first downside target, the rising trendline. This often is a point where sellers get “trapped” and price reverses – far too often sellers will locate stops near such trendlines, and buyers are just as guilty on the way up as well.
Our approach actually exploits this with a much safer strategy to deal with trendline breaks—wait for the break, and then stalk any retracement which shows up.
In this case we want to see if a sellers trap forms here, and more aggressive traders will be looking for any signs of a viable intraday long setup near the trendline break area. Sellers too will be looking to see if a weak bounce forms following the trendline break, and they will try to exploit such a situation.
[wandering off topic]
Speaking of trendlines, a tangental thought: why do sloping trendlines have any meaning? Some analysts put a lot of effort into trendlines that run on for days or decades, and frankly, it does not make any sense at all. People do not earn or lose money along a slope, they react to hard dollar or percentage changes which occur on a purely vertical scale.
We do draw trendlines – all the time – mostly in shorter time frames (intraday, days or several weeks) but we do so primarily because we know other people are looking at them and we want to locate areas where we can exploit predictable human behaviour. We also draw trendlines to identify where ranges and patterns start, and finish, but that is the subject for another column.
[/end wander]
We should get a clue here soon as to whether this becomes a more serious pull back or not. Typically in a strong market, price will not retreat any lower than approximately the 50% level of a tall up bar, this general observation is good for picking out first targets, or for understanding where support ought to come in.
The next location we look to see support come in is the base of the tall up bar, marked as such. If that suppport fails to hold today or in the coming days, then the next target will be a point roughly 50% of the distance between the major swing high and low – on COMPX that’s approximately 2045 – 2050 – not all that far away.
Unless price can regain today’s high in the coming days we’ll have to stay more defensive on the long side.
05.02.09 11:20 #