Reversal Bars: Springs and Upthrusts: 4-2

TVC:US10Y   US Government Bonds 10 YR Yield
In part one (4-1, linked) we outlined the base characteristics of spring and upthrust patterns. In part two we examine two charts that have the potential to develop the behavior, and describe why they are candidates. The two examples use daily perspective charts but the patterns are fractal and translate well to all time frames.

Many popular published strategies center around buying and selling breakouts of prior swing points or patterns and consequently is the first approach that most new technical traders attempt to implement. But failed breakouts are common, and when they fail, they often fail violently. The rapid reversal creates panic among the weak hands who entered in response to the breakout. The panic often results in significant slippage on both entry and exit when poorly placed stops are elected.

Early in my trading career I made a concerted effort to trade breakouts. Ultimately the losses convinced me that, despite what the books said, buying and selling initial breakouts was a very bad idea. Eventually I discovered Richard Wyckoff, Richard Shabacker and John Hill and began to understand why.

I flipped the script and began to develop trading strategies around failed breakouts (my favorite trades) and that entered into legitimate breakouts only after the breakout was confirmed.

Since my trading style is not constrained, I can cycle through hundreds of charts (equity, income, commodities) and time frames looking for setups and situations that fit my pre-established risk-reward parameters. Just as it is “always five o'clock somewhere,” there is also always a trade setup somewhere. You just need to put forth the effort to find it.

As I cycle through the charts that I trade, I simply monitor for markets that, after extended trends, are testing a prior high or low, or that have developed a trading range in the vicinity of an important high or low. In other words, markets that are at critical junctures in their trend where the short-term behaviors are more likely to generate signal as opposed to noise. I am also cognizant of momentum divergences, countable threes, channels, sentiment and other nonprimary factors that might strengthen my view or influence the size of the trade.

Those markets go on my "list" and I begin actively monitoring them for behavior. Note that I often monitor in one perspective lower (IE from daily to hourly) than the perspective I am trading. 10-year Treasuries and the Citi equity charts offer solid examples of charts that would go on my watch list.

One final point: In my work, market behavior is much more important to trading than my fundamental opinion. This is particularly at potential trend inflection points in daily, weekly, and monthly perspectives. Don't get me wrong, I dig it when both my fundamental and technical reads are in sync, but I typically default specific trades to behavior rather than outlook, particularly in the daily and lower perspectives.

The U.S. ten-year Treasury offers a good example of a market that would go on my list. It has described a long uptrend (in yield), there are multiple momentum divergences, the bigger pattern has unfolded in three distinct advances (labeled 1X, 2X & 3X), rates are in a seasonally bullish (rates falling) period. The news/sentiment around rates is almost uniformly bearish.

Note that the market briefly traded above the prior pivot (by 2 basis points) and then traded modestly lower. The small failure generated some selling, but the weakness has not developed the kind of follow-through (for instance a break of the uptrend along the lows of the test) that would convince me the testing process was complete.

Additionally, while I maintain the view that the long-term trend in rates has changed and that over time, they will be generally higher, there are several fundamental relationships that I monitor that may make it possible for rates to fall for several weeks/months before rising next year.

CITI Daily and Weekly:

Citi is also on my watch list. Following a long decline (see weekly) and after absorbing the supply along the downtrend line via a lateral trading range, it has now retreated into a good support zone and is quite oversold. Because of the trading range dynamics, it’s my suspicion is that it will move closer to 32 before producing a tradable spring. However, I am open to the idea that this smaller range may present a terminal spring and will be alert for setups to take advantage if it does so.

And finally, many of the topics and techniques discussed in this post are part of the CMT Associations Chartered Market Technician’s curriculum.

Good Trading:
Stewart Taylor, CMT
Chartered Market Technician
Taylor Financial Communications

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