The Dow Jones Industrial Average shows a head and shoulder pattern that is very obviously and exciting. It is exciting because traders look at it as a cue for a break down in the market.
In any reversal pattern, the neckline is very important because the break of this line confirms the validity of the entire pattern. This is such an important and unambiguous rule but it is also also a wonder why many traders fall prey to this level. The ones who get it wrong every time are the ones who play the break of this level. They get killed ultimately by my favorite set-up: the bull and bear trap.
DJIA fails to break support; rebounds strongly
How did it happen? Candlestick tails or breaks in lower time frame charts convince daytraders (mostly scalpers) to short. But price persist here until a good reason causes it to move. Swing traders who respect support and resistance know the simple concept of buy support, sell resistance. They also know that candlestick tails should be viewed with suspicion. When buying finally comes in, price is going to pop like a cork. Buyers go in strongly because by buying support, their risk is very low. They are boosted by hapless sellers who now rush to cover their shorts. Short covering helps to push price further. (Good swing traders also join in here.)
This set-up is so powerful and so predictable that I called it a high probability set-up. In fact, I gave a clue in an earlier analysis, and specially brought it up again in last night’s hands-on session. We use it to trade the forex, futures, stocks and commodities markets.
Experience and discipline helps; I gave a clue in another analysis
To learn everything I said here and much more, come join my FX Tflow® class where I will help you combine theory with actual trading experience. Call +65 6492 3196 to ask for preview sessions.
