that thrust B equals thrust A and reaction B equals reaction A, This enables the trader to forecast the termination of the next swing in both time and price.Figure 5.2 demonstrates these ideas with Japanese Yen. Two profitable trades are shown.
FIGURE 5.2 Japanese Yen (September 1999). Created with TradeStation 2000i byOmega Research c 1999.
SWING TRADING
85
• Trade 1: A buy la made as market penetrates the 0-1 trendlineand closes above the prior 4 closes. The swing from 81.50 (point0) to 86.00 is a thrust up. We now know the trend is up and theYen is a buy on a reaction. The market has an orderly five-wavecorrection back toward the base or beginning of the move. Thesetup is now complete, A buy is made and profit of 5.50 pointstaken,• Trade 2: Market continues up to above the 88.00 level confirming that the breakout of the 86.00 level is a valid one. Market enters a 1,2.3 or ABC correction pattern. A purchase is made at88.00 on completion of the 4-ctose, trendline break pattern. Profits taken at 90.30 at the parallel objective.Figure 5.3 demonstrates a number of swing chart principles. This isa chart of intraday movements of S and P's with the prices removed.• Spring: A substantial movement may take place after a spring.Market frequently moves back across the trading range as it didin this case,• Penetration of two pivot points in close proximity: Be alert for alarger swing. Close proximity might be defined as two pointswithin a half average bar range of one another. This penetrationled to a reversal of trend. Complete replacement of the priordown thrust shows that the market has shifted from supply to
FIGURE 5.3
Swing chart analysis of intraday movements of S&Ps.
86
THE ULTIMATE TRADING GUIDE
demand. Buy on a correction after a complete retracement ofthe prior move.• ABC/ABCDE correction to a thrust: Anticipate continuation ofmovement after this type action fallowing a thrust.Two trades were possible on this movement:• Trade I: A abort was taken when market tested the pivot point.Note that the prior thrust confirmed the trend as down and marketshould be traded from the short side only. This trade was immediately liquidated when lack of supply was apparent by the spring.• Trade 2- Purchase was made on the A-leg pull back to support ofthe 2 prior pivot point highs. Trend is up as a complete retracement was made of the prior down thrust Target was anotherthrust equal to the prior directional thrust.
ANTICIPATIONAnticipation is the key to successful speculation. One must anticipatetermination of a movement at critical areas of support or resistance. Aswing chart and a bar chart may be used in combination for determining these zones. Two methods are available for market entry at thesezones of support:1. Buy in the logical support zone. A stop must be entered immediately at a reasonable distance below the level of support.2. Buy on a stop above the market once the market enters the zonesof support. The amount above the market should be in anticipation of a wide range bar up which would signal that the correction is over. This order should be entered upon seeing the marketdrop into the zones of support or slightly penetrate it. This typeorder is most useful when the market is in an up trend and thebuy zone is entered at the termination of an ABC correction.If the market is in obvious congestion, the take profits points areestablished in the resistance zone or at one of the following:1. At swing objectives.2. At parallel trend channel points.3. At major pivot points particularly if a reversal pattern issignaled.
4. On penetration of trendline if time factors favor a reversal.
SWING TRADING
87
MOVE ENDINGA run up move ending is signaled when a reaction exceeds any previousreaction in both time and space. Figure 5.4 shows that reaction 3 isgreater then both reaction 1 and reaction 2 in time and space. The reverse is true for a rue down.
FIGURE 5.4
Move ending.
PULLBACK BUYSWhen the high of bar 1 is penetrated, look for a buy on a one-bar reaction or pullback (Figure 5.5). This is particularly true if bar one is awide-range bar and the range is greater than the range of the low bar.When a high is penetrated, the law of bar one becomes a point ofsupport. A purchase might be made in the lower 25% of the range witha stop below support.
FIGURE 5.5 Pullback buys.
88
THE ULTIMATE TRADING GUIDE
Before entering this trade, you should make certain that other toolsor setups are in place to support the action.ACTION AND REACTIONSThere is a reaction in both time and space for every action in the market (Figure 5.6). Reactions are not necessarily equal. They may beequal in space but not in time and vice versa. Therein lies a tradingmethodology and the ability to tell when there is an imbalance in themarkets. For instance, say the action in a market is a 10-point rise infive days. An equal reaction in 10 points down in five days. However, ifthe market has only reacted 5 points in five days, then time has run outon the reaction. The next action is likely to be either a 5 or 10 point riseto the upside to equal the previous action and reaction.This holds true for small moves as well as large moves. This is why abig correction down is likely after a five-wave movement to the upside.The entire five waves up may be corrected with three to five waves down.This concept is why you should resist the urge to buy a 50% pointcorrection on the first day down after an up move.
FIGURE 5.6
Action/reaction.
PRELIMINARY DEMANDPreliminary demand is demand overcoming supply prior to a final bottom. It is characterized by a significant range rally prior to the finallow. Note that rally 2 is greater than rally 1 in Figure 5.7, This actionmakes the shorts nervous because another type movement just might
SWING TRADING
FIGURE 5.7 Preliminary demand.
occur and eliminate any profits. Demand is likely to overcome supply asthe market again approaching the low or perhaps exceeds the low of themove. It's a setup for a possible spring.TIME AND SPACETrend is generally at an end when a reaction exceeds any previous onein time and space (Figure 5.8). Never buy at 50% point on first bar afterthe time and space signal.
FIGURE 5.8
Space and time comparison.
SELL TOPS AFTER A TREND CHANGE
Sell short-term strength in a down trend (Figure 5.9). Buy abort-termweakness in an up trend. This type trading enables one to enter markets with low risk in the event the trade is wrong. Try to develop the
90
THE ULTIMATE TRADING GUIDE
FIGURE 5.9
Sell tops after trend change.
ability to buy abort-term weakness and sell on strength. This type oftrading greatly enhances the profit potential.Short Sell Points (Figure 5.10)Point 1 to point 2. Three-day upmove is positive, however, bars 2and 3 close below opening andthis is a warning sign of distribution.Point 2 to point 3. Corrective action to the 1-2 move is normal.The wide-range bar at point 2sets up a resistance point at thehigh.Point 4, The narrow-range bar atpoint 4 is not demand and supplymay enter the market.Point 5. Three places are shownfor taking a nibble on the shortside. Note the trend line breakand five-day close reversal. Stopis above the three bar high.
FIGURE S.10to short.
Three opportunities
THREE BAR RALLIESThree bar rallies do occur in major moves (Figure 5.11). If it takes placewhen the market is in the run-down phase, it is a warning sign but nota trend change. A three-bar counter up move places market in an exhausted overbought condition particularly if spreads are becomingshorter. A short above the high of the second day may be appropriate
SWING TRADING
FIGURE 5.11
One- to three-bar rallies.
particularly if major trend is down. Generally the first or second dayafter this third bar will provide the answer. A widening range to thedownside should appear or another swing up may be in the picture. Youare selling into near-term strength in a down market.A three-bar rally with increasing range after three dips into a zoneof congestion is a sign of strength (Figure 5,12). A one to one and a halfday reaction, into the buy zone is the time and place to take a position.The buy zone is the area between the 5013: correction point and the threebar low.
FIGURE 5.12
Three-bar rally at end of congestion phase.
HOLDING GAIN AND RALLY FROM SUPPORT
If the market breaks out above a pivot point, as shown in Figure 5.13A,and holds the gain for two to three bars, odds favor that this is a valid
92
THE ULTIMATE TRADING GUIDE
FIGURE 5.13
holding gain/rally from support.
breakout. A two-bar rally after penetrating a series of lows, as shownin Figure 5.13B, implies no supply and bullish forces may be gainingcontrol. A widening of the range would be positive.Three periods after thrust reveal whether it is false or real.Figure 5.14A is a market breakout from a tight formation. This appears to be a valid breakout. The following three bare generally confirmor deny the pattern. Figure 5.14B confirms it as the market was able tohold the gain and make new highs. Action as in Figure 5.14C wouldsuggest failure of the breakout.
FIGURE 5.14
Three-day confirmation of a thrust.
SETUPS FOR TREND CHANGESwing from A-B as in Figure 5.15A is not a trend change until Point Bis penetrated. In Figure 5.15B. 0-1 movement is a demand thrust.When the leg is equal to 1.5 to 2.0 times the A leg, the main trend mayhave turned down. This would be confirmed if point C is penetrated onthe next swing down.
93
SWING TRADING
FIGURE 5.15
Setups for trend change.
Wide-Range Reversal Bar after Run UpWhen the market is moving aggressively up in new high groundand the following actions takeplace, it is time to move stop inlight or take profits:1. A wide-range reversal bar.2. A narrow-range insidebar bounce.This type action implies supply is entering the market (Figure 5.16).
FIGURE 5.17
FIGURE 5.16
Wide-range reversal bar.
Dull rally after thrust.
94
THE ULTIMATE TRADING GUIDE
Sell dull rallies after thrust. A dull rally is a rally with relativelysmall range bars that have a difficult time in reaching the 50% point ofthe down thrust (Figure 5.17 on page 93).TREND CONTINUATIONUnder these conditions (Figure 5.18A), expect a trend continuation:• 0-1 is thrust down in example A:1. ABC up to the 75% point implies a minimum of an ABCDEcorrection.2. If ABC holds above 1, market is neutral.3. If ABC holds above B, market trend may be changing to up.4. If ABC breaks point 1. trend remains down.• 0-1 is a directional move up in Figure 5.18B:1. ABCDE is a triangular correction. Note that it is holdingabove the 50% point of the thrust.2. Penetration of D would indicate resumption of up move.• Market is in a correction to a thrust up (Figure 5.18C). When fivewaves down is completed and wave 5 is shorter than wave 3, anaggressive ABC rally is a possibility. Added fuel is possible ifthin is in the support zone.How a market moves away from a point determines whether or notthat point w i l l hold on next testing. Always go back three to four marketswings to determine market direction. Thrust after a period of inactionusually points direction of move.
FIGURE
5.18
Trend continuation.
SWING TRADING
95
THREE DRIVES TO A BOTTOMThree drives to a bottom with a shorting of thrusts places the marketin an oversold condition and subject to a good sized rally (Figure 5.19).Nate the difference in the three rallies. The third rally was stronger.This is the time and place to consider going long if other parts of thesetup are in place.
FIGURE 5.19 Drives to a bottom.
SUPPORT/RESISTANCE ZONESThe power of a support or resistance zone can be gauged by severalfactors:1. The magnitude of a rally after the market has entered a zone(and vice versa) in both time and apace.2. The number of limes a support or resistance zone has beentested.These factors are a basic expression of supply or demand. If themarket enters a support zone and is unable to have a significant rallywithin one to three bars, then the zone is unlikely to hold (Figure 5.20).A sharp rally shows that, demand exists in that area and is likely to holdOn the next movement back into that zone. Each time a support zone istested, it absorbs some of the underlying demand in that area. That iswhy the old adage, "Markets will penetrate on the fourth testing of aSupport zone" ia frequently true.The logical question is how does one make money with this basicknowledge. The answer is as follows.
THE ULTIMATE TRADING GUIDE
FIGURE 5.20
Tests of support.
1. Anticipation. You must buy the market in support zones and sellin resistance zones when you do not know the outcome. You maybuy when a lower time frame shows evidence of supply exhaustion and demand entering the picture and vice versa. Use theshort-term reversal patterns. You may make several attempts atentry and be stopped out before you are successful. Learn to lovesmall losses because you know a winner is coming. Study enoughcharts until you realize that a number of logical support zonessimply do not hold and some do.2. Position Exits. Appropriate liquidation procedures must be inplace if you are wrong. Have a take profit target in mind andtake profits or at least some of them at such points. Rememberthat the time frame to take profits is sometimes a very short duration. If you do not act promptly, the opportunity may be lost.You should develop the ability to recognize the difference between asharp rally and a weak one, Buy on reaction after sharp rallies and notafter weak one and vice versa. Figure 5.21 shows a chart of S&P's (December 1999, daily). It demonstrates the use of this knowledge. Exactbuy/sell points are not given. The main thrust is to plant an approach totrading.Trade moving markets and avoid dull sideways markets (W.D.Gann). Thin has been mentioned many times but the swing chart in Figure 5.22 gives you a picture of what to look for.
SWING TRADING
97
FIGURE 5.21 S&Ps daily bar chart (December 1999). Created with TradeStation2000i by Omega Research 1999,
FIGURE 5.22
Markets to trade.
TIME AND PRICE PROJECTIONS
Time and price projections for the future can be made based on recenthistory for swings (Figure 5.23). This assumes that future market action will be a reflection of the immediate past. The last two reactions orwave 1 and wave 3 will be reflected in wave 5. This gives projection ofboth time and space. The last three rallies and reactions are used to
98
THE ULTIMATE TRADING GUIDE
FIGURE 5.23
Time and price forecast.
project future turning points. Note that waves 1 and 2 are different, thusthe projection points will differ. The boxed area in Figure 5.23 shows thezone where waves 5 and 6 should terminate in both time and space. Timeprojections are much less reliable than price projections. Some technicians believe that bottom to bottom and tops to tops time projections are
FIGURE 5.24 Royal Dutch Petroleum time and price forecast. Created withTradeStation 2000i by Omega Research 1999.
SWING TRADING
99
more reliable than the above. We cannot reach this same conclusion,but can't disprove it either. Wave 6 can be projected based on wave 2and wave 4. This is done by using the center of the wave 5 box area asa starting point.Figure 5.24 on page 98 demonstrates this idea on Royal Dutch Petroleum. If in a position and market enters the target zone for both timeand price, use the trading tools outlined in this book to take profits ormove stop in tight by use of the lower time frame charts. A reversal ofposition might also be considered, depending on the big picture.TRENDThe trend is an elusive element subject to many definitions, all of whichhave elements of truth. The old adage, "The trend is your friend" is certainly true. Trading with the trend is the key element in everythingdiscussed in this hook. Some subjectivity is always present and we arecertain that the readers of this book will quickly point out that wechoose the trend to fit the case. This is known as hindsight analysis. Wehave very few losing trades when we trade in this manner, The realworld is entirely different and many false analyses will be made. Trenddefinition has a lot to do with your style of trading. If you are trading
FIGURE 5.25 S&P Futures trend defination (December 1999]. Created withTradeStation 2000i by Omega Research 1999.
100
THE ULTIMATE TRADING GUIDE
for the long-term trends, the definitions below are inadequate. One definition of trend is as follows:1. The slope of the 10-bar average: If up, the trend is up.2. Major pivot points: If the last major top pivot point is greaterthan the prior top pivot point then the trend is up. This gets a little fuzzy. ABC corrections to a thrust frequently will have the Cleg going below the A-leg and it la not a trend change.3. Go with the trend direction signaled by the pivot point directionif the two are in conflict. Figure 5.25 on page 99 shows the use ofthis definition.Use of multiple time frames is invaluable in your search for profitabletrading methodologies. For instance, use a daily bar chart for trend andthe 30-minute or 1-hour chart for trading. Just take the trades on the 30minute chart that are in the direction of the daily trend.FIRST DAY IN RALLYThe first day in a rally following a down wave frequently reveals technical makeup (Figure 5.26). Compare the spread and close of this one dayat point 3 to the preceding one day rallies coming off the lows at pointsI and 2. A stronger day implies a shift to the upside with near term demand overcoming supply. Be alert for a trend change. If this is in a bedof accumulation, it may be worth a nibble on the long side.
FIGURE 5.26
First day in rally.
6PATTERNS
The mistake is not being wrong, the mistake is staying wrong.When a woodsman enters the forest, he must pick one tree and cut it. Thesame is true in trading. Once the big picture is known, a trader must decide on a specific entry technique, stop point, and take profit level. Thischapter covers 19 patterns relating to entry and exit techniques. In reading about these various techniques, keep in mind the basic idea of demand overcoming supply and vice versa. A chart is the reflection of theforces p u l l i n g both ways on the market until one wins out.Patterns demonstrate the exact moment in time when demand overcomes supply ( and vice versa) and "the rubber hits the road." These signals are far from 100% correct, and some do fail. Immediate failuremeans a false start. That is where the professional will aggressively takethe other side of the trade. They know the signal is false as evidenced bymarket action. That is why it is so important that the stop loss and perhaps reversal order be entered immediately. Part of your arsenal of trading tools should include trading immediate pattern failures. The takeprofit point is just as important if not more so than the entry. Your trading plan must consist of all three elements: entry, stop, and exit.The following trading patterns will be discussed:• Opening range breakout.• Trend up confirmed.• Spring reversal pattern.• Upthrust reversal pattern.• Yum-yum continuation pattern,• L formation and reverse L.• Double tops and bottoms.• Small morning tails.101
102
THE ULTIMATE TRADING GUIDE
• Clear out patterns.• Overlapping and non-overlapping bars.• Two-day intersection.• Channel trading systems.• The pullback.• High of low bar for buying/low of high bar for selling.• Three bars up/down.• Dynamite triangle.• Narrow-range/wide-range bars.• Two-day flip.• Tight formation breakout.• The importance of exits.OPENING RANGE BREAKOUTSThe opening range breakout la a movementoff the opening. Studies have shown thatthe opening of the day is frequently eitherthe high or low point of the day. A buy orsell order is entered a certain amount fromthe opening, as shown in Figure 6.1.There are many types of breakout trading systems. This is one of the most effective filters for getting on board at thebeginning of a trend whether it is a threebar or a 10-bar trend. Movement away fromthe opening frequently sets the tradingtone for the day and the market will close in the direction of the openingrange breakout. Combine this with pattern setups and you have thebasis for an excellent trading systems. We personally know of at least$200 to $300 million being traded using opening range breakout as oneof the filters for entering or exiting a trade. E. Hadady, Larry Williams,and Toby Crabel have done excellent studies on use of this tool.How much of an opening range breakout is effective? Possible answers to this question are:1, Use a prescribed amount such as eight ticks. This is a criticalamount and anything smaller is less likely to he successful. Thissimply will not work on low volatility stocks or futures. This isan easy statistical study.
PATTERNS
103
2. Make the breakout be a function of the volatility. The volatilitymight be average daily range for a past number of days or primday's range. For instance, studies have shown that if a marketmoves 60% of the prior day's range away from the opening, it islikely to remain in that direction for the balance of the day.Intraday RangesDivide the day into three equal time segments and develop a strategyaround these three bars on an opening range breakout for each time period. One could also use hourly or smaller bars. Bob Buran has done excellent work in this area particularly with S&P's and as confirmationon whether the breakout is exhaustion or continuation.The opening range breakout must be combined with other technicaltools to be an effective entry technique. Figure 6.2 shows six examplesof using a second tool to time your market entry. These additional toolsare: four weeks high or low (Donchain or Turtle Breakout), trendline,tight range of closes, two prior closes, trend filter such as a 10-bar
FIGURE 6.2 Technical tools to use with opening range breakout.
104
THE ULTIMATE TRADING GUIDE
moving average of closes (slope must be up for a buy), and support zonebuying. All of these tools are an expression of demand overcoming supply. There in no pat answer as to which one is best. A number of themcan he programmed into exact trading systems. However, the other twoparts of the trading plan, stop and exit must be built into the system.Both are just as important as the entry.TREND UP CONFIRMEDTrend up confirmed is a four-step process that is present in most movements (Figure 6.3). It is a very useful tool but should not be used by itself. The rules for this formation are as follows (for up move):1. The current bar makes a low below the prior bar.2. The high of this bar is penetrated to the upside ( trend up or signof strength). Best if this is a wide-bar penetration with severalup bars.3. Within one to three bars, the low of an up bar is penetrated (thepullback or lest of the low).4. The high of the last bar in the reaction is penetrated and closesabove it. The low must be greater that the low in step 1. This ispattern completion and your buy point.The stop is the range of the entry bar subtracted from the low of theentry bar. Take profits at the swing target. If the swing target is notreached, then liquidate on two closes below a prior pivot point with theclose on last bar below theopening. There is some flexibility in this rule. Do not letgood profits turn into lossessimply because the price didnot quite reach the target.This technique works exceedingly well in a stronglytrending market and is afirst cousin to the dynamitetriangle. Trade with thetrend. It sometimes takes asmany as 10 bars to completethe formation. It is a simplefour-step process for gettingon board a move. The up barsshould be relatively long withFIGURE 6.3 Trend up confirmed.
105
PATTERNS
FIGURE 6.4 Yahoo trend up confirmed. Created with TradeStation 2000i by OmegaResearch1999.
high closes compared to the down bars. This implies demand or a sign ofstrength.You are buying on strength in trading this pattern. Take some profits on strength rather than on a stop. The exception is when the markethas a clearly defined breakout from tight congestion. Figure 6.4 showsuse of this pattern on a chart of Yahoo,SPRING REVERSAL PATTERN
The spriags and upthrustsconcept originated with theWyckoff Course (see bibliography). It is another way of expressing demand exceedingsupply, A set of rules havebeen devised around this ideain an effort to make trading asmechanical as possible. Basically, the market goes to newlows below a significant pivotpoint and clears out all stops(Figure 6.5). When lack ofsupply is apparent to the professional trader, he immediately buys it and the market
FIGURE 6.5
Spring.
106
THE ULTIMATE TRADING GUIDE
aggressively rallies. The market moves up on a wide range that exceedsthe two prior closes.This pattern occurs at move endings and is generally against, thecurrent trend. It works best when the pattern has been in a zone of congestion and the market makes an attempt to resume the downwardmove. Overpowering demand occurs at the new low with an up move asa result. The congestion pattern proceeding the spring may be one of accumulation rather than distribution.Spring Rules1. A pivot point low is made. It does not have to be the last pivotpoint. It may be several back where strong support was in evidence.2. A fairly strong rally takes place.3. Market moves to a new low below the prior pivot point.4. Within one to four days, a wide-range rally takes place with theclose greater than the two previous bars closing prices. Therange of this bar exceeds the range of the two prior bars. Close isabove opening and mid-range of the bar.Confirmation is when the high of the wide-range bar is exceeded. Aspring that reverses two pivot points is much more significant than asingle pivot reverse. The stop point, is 0.5 to 1.0 range below the low ofthe entry bar. The first target 13 the prior pivot point high.UPTHRUST REVERSAL PATTERN
The upthrust reversal pattern is essentially the mirror image of thespring reversal pattern.1. A pivot point high is made. It does not have to be the last pivotpoint. It may be several back where supply was in evidence.2. A fairly strong reaction takes place. This is not always present.3. Market moves to a new high above the prior pivot point high.4. Within one to four days, a wide-range reaction takes place withthe close leas than the two previous bars closing prices. Therange of this bar exceeds the range of the two prior bars. Close isbelow opening and mid-range of the bar.Confirmation is when the low of the wide-range bar is broken. Anupthrust that reverses two pivot points is much more significant than a
PATTERNS
107
FIGURE 6.6 Yahoo spring upthrust formations. Created with TradeStation 2000iby Omega Research1999.
single pivot reverse. The stop point is 0.5 to 1.0 range above the high ofthe entry bar. The target is the prior pivot point low.This pattern occurs at move endings and is against the currenttrend (Figure 6.6). It works best when the pattern has been in a zone ofcongestion and the market attempts to resume the upward move. Overpowering supply occurs at the new high and selling results. The congestion pattern may be one of distribution rather than accumulation.An insignificant penetration of a pivot point implies lack of demandand a possible move back toward the lows. This is classic upthrust action.An insignificant penetration can generally be defined as one that is lessthan one-half range above the previous rally top. The professional willaggressively sell when he notes the lack of demand. Traders who buy on aslight penetration of rally tops are frequently handed a quick loss. Theability of the market to make a new high is positive. A potential profitpoint is toward the low of the bed of accumulation as the market will frequently drop back to this level after an upthrust.Figure 6.6 shows a number of springs and upthrusts on Yahoo. Onespring ended in failure and that is why a stop is always in place. Confirmation of the action should take place within three bars or it is questionable. This basic idea works in all time frames.Spring and Upthrust Reversal ActionA spring or upthrust may have stronger implications if more than onepivot point is reversed as shown in Figure 6.7.
108
THE ULTIMATE TRADING GUIDE
FIGURE 6.7
Strength of spring thrusts.
YUM-YUM CONTINUATION PATTERNThis is a pay day formation (Figure 6.3). A high pivot point is set up.Market reacts from this pivot paint high for a number of bars followedby a strong thrust through the pivot point high. Rules are:1. Pivot point high is broken with a wide-range bar that exceeds the10-day average range bar.2. Close is near the high of the bar and above the open.3. Confirmation is provided when the high of the breakout bar ispenetrated within one to three bars. This formation is a breakout and a sign of aggressive demand.The downside Yum-Yum is the opposite. This formation is frequentlycalled a breakout. There are more breakout failures than just about anyformation. That is why it is dangerous to place stops just outside pivotpoints. A Yum-Yum (YY) is proof that the breakout is for real. Uponbreaking a pivot point high, abundant demand is present as evidencedby the wide-range bar with a high close. The ability to hold and extendthis gain for three days is further confirmation of strength. This pattern is seen frequently in trending markets. Figure 6.9 demonstratesthe Yum-Yum on crude oil.
FIGURE 6.8
YUM-YUM.
PATTERNS
109
FIGURE 6.9 Crude oil futures (November 1999). Created with TradeStation 2000iby Omega Research1999.
L FORMATION AND REVERSE LThe L formation continuation consists of a strong thrust (Figure 6.10). Ifmarket holds the gain (or loss) for three to five bars with the ranges getting smaller, the market has adjusted to the new price zone and anotherthrust is in the same direction has a high probability. The open/close
FIGURE
6.10
L and reverse L formation.
110
THE ULTIMATE TRADING GUIDE
FIGURE 6