Today I’m showing three days of data to illustrate two different points — a Trader Vic 2B SETUP and a nice example of what I call an Internal Trendline.

An Internal Trendline is just a trendline that was providing support and that when broken, starts acting as resistance as price keeps moving in the same direction. It’s another example of why I treat trendlines exactly the same as support and resistance levels.

2B or Not 2B
Many treat a trendline break as a trend reversal, but the market always has three choices; up, down, or sideways. And after this trendline break the market decided it had further to go on the upside and it did so by using the trendline as a ceiling. This is just an extension of the more common example of price making a single pullback to a broken resistance level. It also explains why I try to leave trendlines on my charts as long as possible.

The market opened with a small gap down and reversed. This has been the pattern all week, so naturally the market did a double reverse and continued down into a nice Fibonacci cluster. We made a 62% pullback from Tuesday’s low that matched a 89% pullback from Wednesday’s low.

This was accompanied by a divergence in the Stochastic and one more thing that is not so obvious. When price breaks a trendline, there is often a significant bounce when it moves an equal distance in the opposite direction. The distance from “B” to the trendline is only three ticks less than the distance from “A” to the trendline. Not safely tradable by itself, but another confirmation of a potential bottom.

Price then rose to test the underside of the longer trendline, made a 50% retracement that bounced from a parallel channel bottom, and finally went to the top of that channel to create a double top. That top is also the 62% Fibonacci target for a large A-B-C marked in blue.

Even more interesting is that this sequence has created a Trader Vic 2B setup. These occur when price breaks a well-established trendline and then makes a strong pullback to a slightly higher high that fails. “C” is 1.2 points above “B.”

I’m 350 miles from my trading library so I can’t look up the figures, but Trader Vic says this setup has a very high probability of marking a trend reversal. But before you get too excited, remember — the market at any time can always choose from three different directions.

For More Information:
Victor Sperandeo: Trader Vic - Methods of a Wall Street Master