Ok, that’s a bit of an exaggeration. I mean, I’ve been trading a long time but not THAT long! Anyways, this post will examine a price pattern that shows up often and is fairly easy to spot on a 30 or 60 minute chart. The two examples that I’ll show below are 30 minute charts. The first chart is the /ES (S&P 500 futures) and the second chart is /NG (natural gas futures). Now, what does ES have in common with NG? Not a lot except for they both are traded. Here’s an important point; almost all things that are traded exhibit similar price patterns. They may not be identical but they will likely be similar. Good traders can trade virtually any underlying instrument using the same techniques. So let’s take a look at the pattern that I’m referring to.
I’ve annotated both the ES and NG charts with the exact same labels. The pattern typically starts with a spike high. A spike high features a long upper wick on the highest candle of a rally. Many traders will short a candle that looks like that because it looks like a good reversal candle. And it is, about half of the time, in my experience. The other half of the time price continues higher. The odds of a reversal in an uptrend increase greatly when this pattern occurs after the spike high (see below).
Those bands that you see on the chart is the 8 SMA moving average including the high and low of the candles. When the bands are sloping up they typically provide support and when they’re sloping down they provide resistance. When they’re are flattening they don’t provide support or resistance so much but that flattening often indicates the prior trend is reversing. I have found that the 60-minute bands are more reliable than the 30-minute bands but they are relatively effective on every timeframe. They are just as effective when they fail to provide support or resistance. How can that be? When what should happen doesn’t happen, the opposite reaction is likely. In other words, if for instance, the rising lower band doesn’t provide support then price is weak and further downside is expected. The same is true when the declining upper band doesn’t provide resistance. That means price is strong and further upside is expected.
If you look at the Price Action category here on the blog you’ll see the 8 SMA bands appearing over and over on the charts. Go ahead, check it out.