Once the polarity flip and the A-wave tendency line materialize, a confirming candle formation typically develops and the market explodes into a new trend. It’s always important to use another signal to time the trade. This can be the candle or simply keying off an important support or resistance line.
While there still are going to be traders who choose to pick the turn, anticipating the polarity flip is a good strategy for those who may have missed earlier entries and want to position themselves as the move develops. While the whole move is not shown in “Setting up,” this particular setup did lead to a 49-point move in two trading days.
These principles work in any market, especially stocks. “Down drift” (below) is a recent example in Alcoa (AA). The initial move down stops at the ridge of support for the last leg up. Similar to the Dow example, the stock drops slightly lower and recovers to test former support. It tests the A-wave tendency line not once, but twice. When it finally fails, it leads to the most consistent move in the sequence.
This methodology works on any time frame. “Day test” (below) is an intraday E-mini S&P 500 chart that includes what could be called an ABC pullback because it has two thrusts in the same direction. In this case, the pattern reverts all the way back to the A-wave before a 17-point move materializes in six hours.
These techniques for honing your ability to more safely time tops and bottoms are not the only types of support and resistance lines. There are double tops and bottoms (some of the most reliable patterns), Andrews and trend channel lines, as well as areas of Fibonacci retracements and extensions.
One of the finer points to realize is that traders don’t have to concern themselves with the news. Generally, what later will be defined as an important news event will materialize near these important magnet points on the chart. Nor are the technicals always precise; other times, the pattern will not give a perfect touch of the polarity line. It only will come close.
To be successful, you have to become comfortable in an uncertain environment. Not everything is wrapped up in a neat package. Sometimes, the pattern will undershoot or overshoot the line. The best that traders can hope for is to manage the probabilities.
It’s also important to combine this method with an additional signal. A confirming candle is probably the best tool. If the candle reversal signal does not look good on a larger time frame, it might be necessary to adjust your expectations. In other words, if you were hoping for a reversal on an hourly or daily chart, but find a confirming candle only on a 15-minute basis, the market may be hinting that the move isn’t going to be as big as anticipated.
In the end, these methods may work because trading is a zero sum game. For every winner, there is someone on the losing side of the trade. That being said, the people who end up winning may give up their shares/contracts because they are satisfied to take the first part of the move, or market fluctuations might shake out the weaker hands. Traders who play the move off the high or low do get frustrated and exit on the first correction. They give up their positions to the stronger hands, who stick with the move through to the end of the trend.
Jeff Greenblatt is the author of “Breakthrough Strategies For Predicting Any Market,” editor of the “Fibonacci Forecaster,” director of Lucas Wave International LLC and has been a private trader for the past eight years.