“Going long” (right) is an example of a strong buy scalp setup due to a combination of factors. The four bear bars down to bar 19 created the first breakout with four consecutive bear trend bars since the open. The final two were especially strong, with big bodies and closes near their lows. Whenever the strongest move occurs late in a trend, it is a climax and is usually followed by a correction. Bears will see the sudden flush as a great opportunity to take profits. They want to exit before the end of the day, and now they have a gift. Many will look to take full or partial profits soon.
Bar 20 is a bull reversal bar, but it is too small to reverse such a big breakout. Also, strong breakouts usually have a second push down before reversing. However, as the market moved above the bar 22 bull doji, and especially as it moved above the strong bar 23 bull reversal bars, most bears would take at least some off, and many bulls would buy. This is a second entry buy signal, and it is also a parabolic wedge, with the first two pushes down being the bar before bar 8 and then bar 14. Notice how the bar 11 high was a pullback from the breakout below bar 6, but it did not reach the bar 6 low. The bar 16 pullback went one tick above the bar 10 low, which means that the bulls were getting stronger. Each pullback tends to get stronger as more bears take profits and bulls buy more aggressively, so bulls expected the rally from the bar 23 low to go at least one tick above the bar 14 or bar 17 low. This gave them the potential to make two to three points of profit, depending on where they bought.
The bulls buy because they know that this is a strong sell climax late in a bear, and that the bears will not look to sell aggressively again until the market goes up for several points. My general guideline is TBTL: Ten Bars and Two Legs. If the bears were planning on shorting again one or two bars later or one point higher, they would not have exited. Because this was such an unexpectedly big gift, they are compelled to exit at least part of their position, making the odds favor a bounce. If bulls bought above bar 20, which is early, they might have used a stop based on the height of the most recent bear leg, which is the four-bar breakout from the bar 18 high (or open) to the bar 20 low (or the bar 19 close).
Bulls then would put their protective stop just below that measured move target and buy additional contracts consistent with their plan. They simply could buy above bar 20, use the wide stop and not scale in. They also could scale in one or two points lower, at the bar 21 low, as the market fell below bar 20, at the close of the bear bar before bar 22, at the bull close of bar 22, below bar 22, above bars 22 or 23, below bar 24, above bar 25 or as bar 25 moved above the prior bar. They could have planned to scale in three or four points lower, and then one more time just a point above their stop. These orders obviously would not have been filled. In any case, they represent a viable plan that keeps total risk in mind.
As for profits, we are expecting TBTL. We get that at bar 27. Some would scalp out with one, two or three points, depending on actual risk. Others would exit as the market moved above the bar 14 low, or as it fell below bar 27 because that is a sell signal. It is the first “moving average gap bar” (a bar with a low above the moving average where the next bar fell below its low) in a bear trend. Therefore, it is likely to lead to the final leg of the bear before a major reversal, which took place into the close and during the next day. It is also a wedge bear flag where the first two pushes up occurred at the highs of bars 21 and 24. And, it was a breakout above the bear channel from the high of the day (not shown), and most breakout attempts against the trend fail.
Al Brooks has traded for 26 years. He is the author of “Price Action Trading: Trends,” “Price Action Trading: Trading Ranges” and “Price Action Trading: Reversals” (Wiley, 2012). Additional trading information also is available at www.BrooksPriceAction.com and www.BrooksTradingCourse.com.