Wednesday, May 1, 2013

The Mighty Momo! Pt 2- Wood For The Trees.

Below is a recent example of the pattern in play. This time, I've included volume to show how that works with the progressively smaller magnitude waves of selling (See "The Mighty Momo!" for the original mark-up, which was a short)...

Picking out the mass of volume is the idea.
The lower volume on each successive leg of selling compared to the prior one is a sign that the sellers are losing conviction. Add in the "Golden Mean Extension"- which isn't always this clean- and you have something which gives a "trade-able bounce" (subjective: refer to the above link for my thoughts on that) around 80% of the time.

So, at first glance, it looks like volume isn't favourable for the above setup. But that's a case of missing the wood for the trees- just have a look at the body of volume. They do provide the decline we're looking for in order to take a trade. The "trees" do provide us with evidence of short-term trend exhaustion and, as such, give a heads-up as to where you'll find the pivot. Again this is not an exact science and you need to look at recent PA to determine how volume is signalling turns relative to price (at the exact pivots, slightly above/below etc).

Incidentally, I've noticed that the GME tends to also be present in terms of time. IB's charting package doesn't provide that tool, but it's quick to do with a calculator plus the approximate times the lows/highs occurred.