Testing the Highs
A strong move with few pullbacks works well for trend traders, but frustrates those of us who depend on clear pivot points and retracements. A consolidation period catches trend traders in whipsaws, but will often give reversal traders an extra edge. I suppose we just have to take turns, but today we seemed to have a combination of both.
Opening with a small gap, there were no large retracements until we entered the sideways pattern about lunchtime. I’ve talked recently about early pullbacks being near 62% and later ones closer to 38%, but the rally that started yesterday insisted on small pullbacks all the way up.
When all the early retracements are small, it may be an indication that either a TREND DAY is in the making, or at least that there are many traders afraid of missing a move to the upside. For me, that means looking for smaller pullbacks than normal, but only if I can find an entry with a very close stop.
At 7:30 this morning (Pacific time) there was finally a 38% pullback, and using the short moving average as an entry trigger, there was a reasonable trade to the blue parallel. That wasn’t the high for the day, but it was pretty close.
If it wasn’t so late in the rally, a return to the lower trendline would have given a potential entry, but notice how much price had flattened by the time we got there. We also didn’t get another 38% pullback until after the trendline was broken, and by that time the moving averages were intertwining.
If you keep drawing trendlines and parallels for channels you can see the drop in momentum as we end the day in a small rectangle. Today doesn’t exactly fit my definition of a trend day, but we did open at the low and close at the high.
If you look at a longer term chart (45 minutes or greater) you can see we have worked our way into a congestion area at the recent November highs. Only the Russell 2000 finished the day at the top of its range. Tomorrow could be interesting.
