The HB zone represents the 50%-61.8% retracement of a price range. The price range can be from a pivot low to high or on just a single candle’s range. What type of candle would I apply the HB zone to? When a particularly large candle with a long wick forms on a chart I’ll use that as an anchor for the price action following that large candle. On this MU chart the daily candle from 8/25/2021 certainly qualifies as a large candle! I then overlay a Fibonacci retracement drawing on the candle from the high to the low since it’s a potential bearish reversal. My thesis then becomes that if it is indeed a bearish reversal candle subsequent price action must confirm it. This is a good time to point out that’s how I treat all of my theses (or you can call them guesses). I’ll say **if** that’s a bearish reversal candle **then** subsequent price shouldn’t exceed the HB zone of that candle. Based on that analysis I’m willing to initiate a short (bearish) position within the HB zone of the anchor candle with a stop above the high of the anchor candle. In this case the high of the anchor candle was 77.03 and the HB zone was between 74.60 and 75.18. The HB zone is then expected to provide resistance for future price action. On the chart below I’ve numbered the candles that subsequently found resistance from the HB zone of the anchor candle.
Price found resistance from the HB zone 10 times in the following 23 day’s! On day’s 4 and 9 price exceeded the HB zone but on neither day was the stop above 77.03 triggered and on both day’s price closed below the HB zone. Actually that’s not entirely true, on day 9 price closed exactly at the top of the HB zone at 75.18! I’ll leave it to you to decide it that was simply a coincidence or not.
One of the keys to my trading success over the years has been due to the if/then approach to chart analysis. A candle can initially appear to be one thing only to turn out to be an entirely different thing. If a candle appears to be signaling a reversal then it must prove it! On the AAPL chart below it certainly appeared on 9/1/2021 that price made a bearish reversal. I can promise you many traders got short near the close of that day.
How did that work out? By the second day following the apparent bearish reversal price disproved the thesis as price closed above the HB zone of the anchor candle. Let’s say that I had taken a short position at the close on the first day following the anchor candle because, even though the high of the day exceeded the top of the HB zone, it closed within .01 of the bottom of the HB zone. (Again, I’ll leave it to you to decide it that was simply a coincidence or not.) I would’ve closed the short position on the 154.30 close of the very next day. That would’ve been a one-day trade with a loss of just $.65. Pretty manageable as opposed to traders who initiated a short at the 152.51 close of the anchor candle and who were likely forced to exit their positions near the 157.26 high where they were sitting on a three-day drawdown of $4.75! You know how often traders exit a position at the worst possible time just prior to price reversing and moving in the direction they initially though it would. We’ve all been there!
I hope this post has given you a new tool to give context to your price action analysis. Try it for yourself and see how well it works. Questions or comments? Add them below.