Reversal Bars Part 4-1: Springs and Upthrust

TVC:US10Y   US Government Bonds 10 YR Yield
Spring and Upthrust:

In the first three parts of this series (linked) we covered the basics of reversal bar patterns including hooks, pipes, key reversals, and climaxes. In this piece we focus on springs and upthrusts. Historically these patterns were associated with trading ranges, but I find the concepts useful anytime a market tests significant support or resistance. This is particularly true in the modern environment in which price indecision resolves itself more quickly and trading ranges are less frequent. A spring or upthrust bar often signals a significant reversal and makes it clear that a change in the supply demand imbalance has developed.

The patterns covered in the first three parts mostly occur near the end of uptrends and downtrends. In this part we cover patterns that often mark the end of lateral trading ranges or tests of already defined lateral support and resistance zones. We will focus mostly on tests of defined support and resistance, spend a bit of time on trading ranges and take a quick look at the technical position of the 10-year Treasury in its trend to illustrate some of the concepts.

Spring: Price thrusts sharply below a trading range/prior low support level (often in reaction to bearish news) before quickly reversing and closing back above the violated support. The quick reversal traps bears who entered fresh shorts in the belief that the prior downtrend was resuming. Volume on the spring is typically quite high (the higher the better) and the price spread should be reasonably wide. To qualify as a spring, the reversal must occur quickly. Slower violations that fail can be thought of as washouts or bear traps.

Upthrust: Price thrusts sharply above the trading range/prior resistance level (often in reaction to bullish news) before quickly reversing and closing below the violated resistance. The quick reversal traps bulls who entered fresh longs in the belief that the prior uptrend was resuming. The volume on the upthrust is typically quite high (the higher the better) and the price spread should be reasonably wide. To qualify as an upthrust, the reversal must occur quickly. Slower violations that fail can be thought of as washouts or bull traps.

For simplicity we will focus on springs rather than upthrusts, but functionally there is little difference, other than the fact that springs, which occur at bottoms, are often more violent than upthrusts, which occur at tops. These behaviors often develop as the market tests a strong support or resistance. As in prior reversal bar examples, the structure often marks a meaningful change in the supply demand balance.

Spring patterns typically develop in reaction to news or fresh bearish information that pushes the market sharply below support. But after the initial reaction below the range/pivot lows, fresh selling fails to materialize. The lack of new supply signals that the immediately available supply is exhausted. The quick rally back inside the range traps new shorts and generates significant covering. Typically, the time spent below support is very brief.

Springs reveal the nature of the supply waiting below the trading range or pivot. If a market springs a range, finds no new supply and rallies back inside the range or above the pivot, it can be assumed that the range has cleared out the supply leaving the market is now free to rally. Generally speaking, springs should reverse at a reasonable level and do so quickly as new sellers fail to emerge.

The structure is often tested. If a test occurs, it should be on lower volume and will generally be at a shallower angle than the initial decline. In my view, the spring low should not be violated by any significant degree or the structure is invalidated. Initial stops placed just beyond the extreme of the reversal bar should be secure but they are often too far away from the entry to represent a reasonable risk reward and typically are moved aggressively higher.

The depth of the thrust below the support, the volume it occurs on, the chart perspective it occurs in and the aggressiveness of the rebound are all factors when assessing the importance of the spring.

In part 2, we will cover trading springs and upthrusts and spend some time illustrating the concepts with the current 10 year Treasury chart.

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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