Many think that when a correctly drawn trendline breaks, prices have reversed. That’s not quite the way it works. A trendline is simply a “best representation” of the direction of a market, showing how quickly price is rising or falling. The only conclusion you can draw from the break of a trendline is that conditions are changing.
The market may actually reverse, but it may just pause and continue higher. Or it might decide to go sideways for a while. A 15 minute chart shows we are following the third course.
Point 1 shows the end of a two day rally, as price broke both a trendline and a short moving average. Sometimes this leads to a complete reversal, but more often there is a re-test of the rally high. This occurred at point 2. If point 2 had exceeded the rally peak we would have had a Trader Vic 2B SETUP, and a potential trade. But since it didn’t, what we get is a trading range.
After you’ve had a re-test of top following a trendline break, you can draw the two yellow lines shown in today’s chart. These lines will define short-term support and resistance, and trades between them should be taken with care. A break of the bottom line will confirm a change of trend, which looked like it was going to happen this morning at point 3. When that didn’t occur the equivalent of a rectangle formation developed.
A good upside breakout of a rectangle requires a volume increase, and we didn’t get that this afternoon. Today was Columbus Day, with it’s expected lighter volume. Tomorrow when some more traders return, maybe we’ll find out which side of this trading range will be broken.
Resources: Trader Vic — Methods of a Wall Street Master by Victor Sperandeo