Monday, February 28, 2011

A weak move off the first pullback may indicate first reversal ahead

The first pullback, especially a deep one is often your best bet for a swing trade since by then everyone who has missed the early move will jump in for the ride. First pullbacks after the first reversals are usually the best, since the initial move gives traders a better price to enter.

Today's first pullback at b9 broke above the previous swing high, but the breakout bar was weak and overshot a trend channel line. Normally, this only means a 2 or 3 legged pullback and sometimes the second leg stops near the ema giving a gap bar. However, if it ticks below the entry bar by more than one tick, especially if it does it a second time (b17,b22), there is a good chance you just missed the first reversal. You should always exit your swing portion and look to enter short.

The weak A2 entry bar at b29 further confirmed more weakness to come and b40 provided a later entry on the short side.

First pullbacks without a first reversal and often even after first reversals are usually reversible trades. The idea behind a first pullback is that everyone by now has recognized the direction has turned and wants to get in the new direction. The move needs to be clear and strong. Any weakness indicates you have read it incorrectly and you should look to exit.

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