Monday, September 12, 2011
Major reversal: Bear Trendline break and HL
Usually a major reversal of a bear trend requires a strong break of the trendline and a LL test. But sometimes, there will no LL test and you would need to enter on a HL. These cases will run in a very hard trend for only one leg so you need to be able to identify these and enter on the HL.
The precondition to a strong reversal late in the day is a very strong move in the first hour (b1-b8). Without a prior show of strength, any reversal without a LL test is likely to fail.
The most important characteristic of a such a HL major reversal is that the trendline break will take out multiple swing points (b57-63 took out 3 swing highs). The second important characteristic is that the trendline break move goes well beyond the ema and closes many points above in a one legged move. A multi-legged failed breakout giving a possible W (b19,50,57) of the range is more likely to fail than a one or 2 legged strong break of the TR.
After b63, traders should buy a pullback to the ema and possibly any reasonable pullback. A 2 legged pullback (b69 ended the first leg) is very desirable and will usually give a hard trend. This essentially works as an A2 or fL2 (b68 was L1), which can be traded as a swing entry after a reversal.