After a few days away from the market, I tend to be quite cautious trying to find trade entries. This is particularly true after a light volume trading day as we had on Friday.
What I am looking for is an entry that tells me quickly (and inexpensively) when I am wrong. This is often a break through a level where a reversal would say “Get out now!” Sometimes it will be a moving average — other times a support or resistance level.
Fortunately, Friday set up a solid low to use as a benchmark. We opened down, but the previous pivot served as temporary support and we bounced, producing a very short-term double bottom. But it fulfills my requirement for a line in the sand, a place where I can have price action help make my decision to exit. But as you can see, it wasn’t necessary.
A fast, hard drop followed, and if you chose to take profits as the momentum slowed, you would still capture much of the total move. And by creating parallel channels there are several more potential entries for smaller, but still profitable, trades.
Point #2 pulls back to a steeply descending blue moving average. This is where I normally start looking for pullback entries. The fact that it moved slightly beyond the moving average gave another entry/exit point, the crossing of the average.
Price crossing a moving average, as a system, is a losing proposition. But that’s not the way I use them. At point #2 there is no question that the trend is strongly down, so all I’m looking for is a trigger that can be used in both directions — to get me in, and out if I’m wrong. A moving average can do that job well.
After the next pivot bottom you can draw a trendline, and of course, its parallel, which is hit at point #3. Once again we crossed the fast moving average, and once again it acts as a trigger.
Although a similar situation seems to happen later, the conditions are not the same. We eventually get to a parallel trendline and cross the moving average, but the momentum has vanished. You can see this as the yellow trendlines curve towards horizontal.
One advantage of drawing many trendlines is that it makes the loss of momentum obvious. And it takes good momentum to make this particular trading technique work.
