From the May 2013 issue of Futures Magazine • Subscribe!

Trading off high-range bars

No man’s land

Look at the territory covered by the wide-range power bar the same way a quarterback in a football game directs his team down the field. The power bar defines a certain territory on the chart. In instances where price stays within the range of the bar itself, action after the wide-range bar will be choppy as bulls and bears wrestle for the upper hand.

“Down day” (below) is a daily chart of the SPY exchange-traded fund (ETF). The chart shows a key bearish power bar on June 21, 2012. Price action could not break cleanly away from the bar for a full month until July 26, 2012. The territory became gridlocked until price could confirm its move above or below the range of the power bar.

In the zero sum game of trading, the mistakes of bulls fuel bear markets and the mistakes of bears fuel bull markets. In this post-financial crisis era, the tendency has been for bears to attempt to replicate the crash. They have to cover when they fail, and many times they’ve been squeezed out. Once price definitely clears a power bearish bar, a short squeeze materializes and prices tend to rise. This tendency is particularly pronounced in equities.

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