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In my Trading Tutors Newsletter article last week I wrote about a setup on the Euro (EC-Spotv in ProfitSource) for a potential high. Specifically, I was watching for a turn around the 1.3330 price target, which was the 50% milestone of the previous bear market range. This is shown in Chart 1 below.
Chart 1
click to enlarge
At time of writing (Wednesday, August 11th), the market has turned down from this level and started to head lower. However, when would we know if this was a significant top? How could we tell?
It can often be weeks after a top has come in before we can safely call it a significant top. Sometimes the market will fall straight away but at other times, it will take a while. These can be frustrating periods for a trader to sit through, especially if they have a substantial position in the market. There are clues that we can look at to help us rate the strength or weakness of a move.
One way is to look at the swing ranges, as shown in Chart 2 below.
click to enlarge
Notice in Chart 2 that during the last bullish move, which has lasted 60 days so far, the largest pullback we saw was 298 points. According to WD Gann, we would like to see a pullback from this top of more than 298 points for what he called an Overbalance in Price, which we discuss at Safety in the Market’s Interactive Trading Workshops.
So far, the market has run down 260 points at time of writing, so we have to wait and watch. A lot of trading is simply just being patient!
If the market can run down for a larger range and then form a lower swing top to turn the trend down, we would be much more confident that a top is in place and the next bearish move has begun.
However, this can take a week or more to occur, so for a trader, it is a matter of taking it one day at a time, and letting the market do what it is going to do. All we can do is sit back, watch and wait – and trade accordingly!
Be Prepared!
Mathew Barnes
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