We have a certain technique that we utilize at Vega Options to help identify a good trade location if a candle (on any time frame) appears to be a significant reversal or continuation candle. We’ve introduced it before in this post called The Law of the Large Candle. It essentially looks at any significant candle (large size compared to other candles or with a large upper or lower wick indicating a potential change in sentiment) and applies the if/then rule to that candle. The if/then rule simply states that if a candle is a significant reversal or continuation candle then the following candle should find support/resistance within (or very near) to the HB zone of the significant candle. The HB zone represents the 50%-61.8% retracement area. Instead of a long discussion here explaining the intricacies of this strategy, why don’t you just look at the images below and see if it all makes sense.
Below is a daily chart of the SPY with a description of how I use the HB (Half-Back) line to trend follow an instrument.
Below is a compilation of tweets from 10/29/2021 – 10/30/2022 and the “bands” mentioned in some of the tweets are the 8 SMA high/low/close moving average lines. On some charts you’ll also see a solid line with dots on it that represents the Half-Back (50% retracement) of the prior candle.
As mentioned many times before the same patterns occur on all charts and time frames. Below is a chart of gold futures. The hourly upper band is always a good short location but at #1 the bands were flattening making the signal weaker. Drop down to the 30-min chart to analyze the price action at that time. The HB zone (50%-61.8% retracement) works on large bars but is also effective on price ranges. In the /GC example I used the 3-bar range since that was the low of the bar below the lower band (and prior day low) to the high above the upper band. If price was breaking out then zone should be support.
Below is the NVDA daily chart with the HB line shown. No opportunity to buy $NVDA if waiting on the daily candle to retrace to the prior day’s HB zone…
…however a more aggressive buy was available based on the HB zone of the day’s opening range (30-minute chart).
The Wed/Thurs price action on the 60-minute chart offered several clues to the bullish bias. First, price failed to follow-thru on the lower band breakdown and then found acceptance at the upper band. Friday’s strong upside move was consistent with the 2 prior day’s price action.
I posed these questions based on yesterday’s /ES 30-min chart for one of my followers: Price rallied on the far left side of the chart with all candles closing above the HB line. That’s bullish. What are the 2 reasons I identified that candle as a potential bearish reversal? If it’s a reversal then where is my entry and stop? (His answers are shown on the charts in white text and my comments on his response are in red text.)
Candles 1-3 were finding resistance at prior candles HB zone and closing below HB. That’s bearish. Candle #4 closed below HB but there was something different compared to prior 3 candles. What clues does 4 offer that trend might be changing? There’s no setup yet.
After the close of that candle what caused me to label it as a potentially bullish reversal? Back to the if/then analysis. If that’s a bullish reversal then how do I trade it? Where’s my entry and stop?
Below is the daily chart with volume profile. It’s the only chart I draw trend lines on. I try to limit them to only what I consider the most significant ones. This is the chart I base much of my *long-term* analysis on. Only the yearly (high/low/HB) pivots are shown.
Once I’ve drawn the trend lines I save them as the ‘yearly’ drawing which I can then load on any other time frame chart to see if any of the pivots and or bands coincide with the trend line. The weekly bands helped provide context to the price action.
When I display the yearly trend line on the 30-minute chart I gain more context for the price action. I’m expecting that price *may fail* at the trend line but I can use the HB zone strategy on the 30 to actually trade it. First, candle #1 appeared to be a failed breakout…
so I applied the HB zone to that candle and when candle #2 slightly exceeded the top of the HB zone but reversed and closed below it provided me with a second reversal candle to apply the HB zone to. The candle following #2 reversed within $.01 of the zone and price dropped
The final 3 images below are pretty self explanatory. All of the relevant comments are on the charts.
This chart of IBB illustrates how the HB zone of a significant candle remains a price target sometimes well after a reversal occurs.
You can post comments or questions below.
i can think of complementing this with supply and demand zones..
Absolutely. I encourage everyone to take my work and make it into their own by adding or removing studies. I do think you’ll find that many of the supply/demand zones line up well with prior period’s high/low/HB levels. Since TOS will draw those levels on the charts automatically I find that to be a great time-saver.