(1) Looking at the overnight action in /GC (Gold futures). Textbook price action so far this evening starting with the bullish reversal candle labeled #1. It was a relatively large candle with a long lower wick. That type of candle indicates that there was a change in sentiment where sellers had been in control but buyers stepped in and took price higher before the seller’s could gain price acceptance near the low. While that type of candle often represents a reversal it’s the test of that candle’s strength on subsequent candles that will define whether or not the buyer’s really have the upper hand. After the completion of candle #1 it’s important to see how price reacts on the first pullback. Notice how the three candles following large candle #1 are much smaller. That’s consistent of a simple retracement of the prior large move, not a reversal of it. The lowest price of those three retracement candles remained above the large candle’s HB zone (Half-Back is the 50% retracement level and the HB zone includes the 61.8% retracement)
Price then resumed the rally and as it reached the declining upper band of the 8-hour SMA it pulled back slightly and then formed large candle #2. Another sign of strong demand! Large candle #2 moved through the upper band when it should have been rejected by it if price was still being controlled by the sellers. By the close of candle #2 we’ve seen three instances of strong demand; two large demand candles and one instance of price disregarding the declining upper band of the 8-hour SMA. Following large candle #2 price basically formed two Doji candles which are neither bullish nor bearish. They’re a sign of indecision but very often they lead to continuation of the prior move. As with the price action following large candle #1, the ensuing pullback was not able to drop below candle #2’s HB. Still bullish!
Another surge in demand led to large candle #3 being formed. That candle found resistance near yesterday’s HB (as expected) and is currently in the process of pulling back towards it’s 1816.60 HB price level. If the buyer’s are still in control, and so far they’ve given no reason to think that they’re not in control, price should remain above 1816.60 and then continue the rally. The 8-hour SMA has turned up so it’s providing support should price experience a larger pullback.
Checking the chart one more time before calling it a day and price has indeed held above candle #3’s HB and then rallied back above yesterday’s HB. The buyer’s continue to be in charge!
(Below) Price continued to rally overnight until price hit last week’s high where it was rejected . This is a good place to discuss why I Delta Hedge (DH) my trades at important price levels. This is a perfect validation of that strategy. I knew with absolute certainty that there would be sell orders resting at last week’s high. What I have no way of knowing (nor does anyone else) is how many sell orders are there. I have no way of knowing if price will just pause there or have a small rejection or if there’ll be a major reversal. By DH’ing a position at an important level I remain in the trade but I drastically reduce or even eliminate the original risk of the position.
That’s it for now. I may follow up with additional content later so check back occasionally. As always, comments and questions are welcomed!
9/25/2021 Update: The original post was from 8/31/2021 but this week provided yet another good example of ‘the law of the large candle’ (still have to come up with a catchier name!). SPX had a large gap down on Monday due to some bad news and price continued to fall following the open. However, late in the day price rallied strongly and left a long lower wick on the daily candle. Was that a bullish reversal and the start of a rally? Maybe it was a fake-out and price was going to plunge again! Impossible to know on that day so I wait for the following day and watch the HB zone to see how price reacts. I showing the full HB retracement zone (50%-61.8% retracement) of the large candle and that resulted in the support range of 4354.43-4342.98. The low of the following day was 4347.96 and the closing price was 4354.19. That close within $.24 of HB. You can see what the results would’ve been had someone gotten long at HB. 🤔
And then there’s TSLA. Sometimes it takes awhile before price makes it’s way back the the HB zone (and sometimes it never does). 5 days after price formed a bullish reversal candle with a very long lower wick it came back to retest the large candle’s HB zone. In this example, price didn’t initially find support in the HB zone and dropped through the zone but by the close price was back above HB. Any long position taken at the close should’ve used a hard stop at the 718.62 low of that candle. This example makes a good case for waiting until near the close of trading to initiate a position if price is near or above HB.
Great demonstration of bar-by-bar analysis and use of key levels!
Thoroughly enjoyed reading your tape reading analysis! Personally I find them tremendously helpful in understanding the “message” or “motive,” if you will, behind the pictures created by the candles, the bands, and the important price levels.