BPA trading room Q&A: February 26, 2015
I sold Crude Oil at 11:30. Since V-bottoms do not exist. I thought a test of the low, or at least the trading range, a higher probability. Would you explain why V-bottoms do not exist?
Video duration: 4min 28sec
V-bottoms not what you may think
V-bottoms are almost always something else. Just because I say they don’t exist does not mean the market has to continue down during breakouts. It’s similar to what happened to the bulls and to the bears in the Emini as well, right? Whenever I see a bear trend like this and the market’s 20 or 30 bars into the trend, and then I see the biggest looking bear bar of the entire screen, you have to be asking yourself, “Okay, that is an important bar. It’s probably either going to be an exhaustion bar or a measuring gap.” Which is more likely? Ok, that is the question: “Which is more likely?” And always, always, always Exhaustion Gap is more likely than Measuring Gap. It can become a Measuring Gap, but it’s more likely to be an Exhaustion Gap.
So with that in mind, exhaustion — usually, you’re going to get a couple legs sideways to up for 10 bars or so. When I see 56, I just let it go. Sometimes, I’ll miss a huge trend that just crashes, but I’d rather miss it because I know the probability is higher that it’s probably a more exhaustive move and exhaustive sell climax than it is a Measuring Gap. So for me, that’s why I would not be looking to short.
Look at other timeframes
Now, in terms of V-bottoms, this is not a V-bottom. It depends. Obviously, this fits the conventional definition of a V-bottom. The market was in a bear Micro Channel and a bull Micro Channel, without much of a pullback. If you look at a smaller timeframe chart, there’s probably a Micro Wedge or a Final Flag in there – I’ll put up at a one-minute chart. Most V-bottoms are something else on smaller timeframe charts. On the one-minute chart, it’s a Wedge Bottom.
So, V-bottoms are almost always something else. What about a 60-minute chart? A Final Flag reversal, Expanding Triangle, three pushes down, one, two, three, or one, two, three. Anyway, it’s an Expanding Triangle bottom. On the five-minute chart, you can call it a V-bottom. Usually if you get a V-bottom, and it’s not a Final Flag and it’s not a Major Trend Reversal, usually you’ll get a Higher Low Major Trend Reversal later. This is the Higher Low Major Trend Reversal, not very many bars down, so probably a minor reversal in a trading range. But that is the first opportunity that the pullback bulls really had to get a Higher Low Major Trend Reversal.
My point is that V-bottoms — I never think of them in terms of V-bottoms. This is what you would call a V-bottom, but I would not think of it in those terms. It’s like all those stupid candle terms, like Haramis and Dojis and Shooting Stars; it’s all nonsense. You try to apply some magical term to the thing as if saying the word increases the chances that you’re going to make money, and that’s not how I think. How I think is support and resistance. The market’s always probing and it needs to go too far to find out how far “far enough” is. So whenever I see a big bar late in a trend, I’m thinking, “Probably an exhaustive move and probably a reversal soon.” Usually, when you get this, you’ll get a Micro Double Bottom, arguably down 56, up 57, down 58. And I just showed on the one-minute chart it actually was a Micro Wedge.
But in any case, when I see 56, I’m not going to short. I’m not going to short. It’s the biggest bear bar in a trend that’s gone on for 30 or 40 bars, and it’s more likely to be an Exhaustion Gap leading to a rally, if not on 58, then soon. On the Emini, we had this, but we went down further. So to me, I would not take the short because of the risk of exhaustion.
What the Emini was doing at same time
Emini, you can say the same thing. Well, wasn’t 58 a potential V-bottom? Wasn’t 62 a potential V-bottom? Yes, but I needed more — I got more information with the Low 2 late in a bull trend, and then on the big sell climax, 67. Usually, when you get a V-bottom — you call this a V-bottom — usually, you get a Micro Double Bottom with it, or you get a Final Flag like this. Or usually, you get a pullback to a Higher Low in the Second Leg Up. But sometimes, they look like Crude Oil did today, a textbook V-bottom.