BPA trading room Q&A: September 28, 2015
I had a situation this morning at 09:00 EDT (06:00 PDT), on the 5 minute Dollar versus Yen Forex chart. It was late in the bear trend, price formed a trading range and a higher low… we had a bull breakout, but a lower high, and at the 60 minute moving average we had bad follow-through. Is this a low probability event, or am I not understanding price action?
Video duration: 3min 4sec
Bull breakout but poor follow-through
Here’s the 5 minute Dollar-Yen. And he said at 6 o’clock – so here’s the 6 o’clock bar. We have a bull breakout, but a lower high. And at the 60 minute moving average we had bad follow-through. I have an idea what the rest of the question is going to be like. Let me go back to the question.
“It was late in the bear trend, price formed a trading range and a higher low…” Okay. Trading range higher low, triangle… basically a triangle… and had a strong bull breakout right here. But just as the breakout was about to continue and make a higher high — above this high, it then turned around again and the bear trend resumed. “… Is this just a low probability event, or am I not understanding price action?”
Low, or high probability?
Yeah, I have a couple thoughts about that. I think this is a higher probability, but let me go to real-time. So we’re in a broad bear channel or trading range. We have a double bottom pullback, so two pushes down, basically a triangle. But unless we get above this high, the best the bulls get is a trading range. We have one leg up, pull back, second leg up. And if you’ve been in the room for any length of time, you’ve heard me talk about second leg traps in trading ranges. A second leg trap means you have a first leg up, a pullback, and then a second leg up that looks fantastic — except it does not get above the top of the trading range. And until it gets above the top of the trading range, you have to be suspicious that it might be a trap, a second leg trap, a strong second leg up in a trading range.
And then you see this bar and you say, “Darn, that’s terrible.” This might be a second leg trap. With that kind of bad follow-through and the market not getting above the prior lower high, I think, to me it’s a problem. It’s a big, big problem for the bulls. And to me, I would not have bought the close of that bar, and once I see this, I start thinking “I’m in trouble,” and look what happened next. Okay? So the bulls have bought this close. What do they think when they see the next bar? They think, “Oh, this is… that’s terrible. Al talks about this stuff all the time: that you need a good follow-through bar, and here I have a bad follow-through bar and a lower low. You know what, I’m going to try to get out break-even. Maybe I’ll try to buy more 10 pips below and try to get out with a profit on my second entry, break even on my first.” Well, all the bulls have bought this close. Guess what? When they see that next bar, they say, “Oh, this is terrible. I’m going to try to get out break-even.” They place a limit order to get out here, so when the market gets there you have a lot of bulls selling.
Bulls can be bears too
What happens to a market when all the bulls are selling? The bears are always selling, right? The bulls are supposed to be buying. But now, you got bulls selling so what do you think’s going to happen? … … Okay?
So I think that answers your question. I hope it does. I hope I was clear.