From the May 2013 issue of Futures Magazine • Subscribe!

Trading off high-range bars

Another analogy is how a meteorologist describes a key attribute of the atmosphere. Viewers watch “The Weather Channel” and the satellite loop for the direction of the jet stream. Trading power bars can be similar. Consider this the jet stream trade. The U.S. Dollar Index showed a bearish power bar on June 29, 2012 (see “Weather vane,” below). That bar was retraced, causing a smaller-degree short covering phase that formed the top. Short covering can materialize anywhere on a chart. All you need is one group large enough to be wrong. In this case, bears may have been early. In any event, a top materialized.

If bears can succeed at taking down the price action in a specific territory, they can do it again. It’s much like a football team having a certain tendency in the final 20 yards before the goal line. This territory becomes a jet stream, and if price action revisits it, the results might be the same. In the case of a topping market that failed to go lower just prior to the top, post-top price action might freefall as it did before. In the case of the U.S. Dollar Index, once prices entered the range of the bearish power bar, the market collapsed.

Another example can be seen on the five-minute Nasdaq chart (see “Short-term slip,” below). In this case, we have bullish territory sitting atop a prior bearish range. Once the bullish territory is violated, the drop is bold and swift because of the prior success that bears had in claiming that particular territory.

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