The third leg as an Intermediate top.

Aashish said:

You had made an interesting comment this morning on CNBC about the 3rd leg usually accounting as the intermediate top…Could you please elaborate a bit more on that?

My Notes:

For some reason, three moves in one direction is the sign of the trend reaching a short term saturation.

case 1. Elliot Waves, where three moves in the primary trend (Wave 1, 3 & 5) signal short term exhaustion.

case 2. Head and Shoulders, where three tops or bottoms are formed.

case 3. Broadening formation, where three points are required on one side to confirm the pattern. So we come to the three drives pattern (this is different from another pattern based on Fibonacci ratios).

In case of a rally,

(a) Two higher tops are made. A trendline is drawn connecting these tops. A third rally begins which exceeds the trendline (showing exuberance).

(b) A momentum indicator like the RSI, CCI or Stochastics shows bearish divergence.

Sell when prices retreat from the third top, giving a sell signal by closing below the nearest swing low. An intermediate top may be in place.

Monday morning – big gap possible

I finally got a much better video working. The “How to test a trading system’ is reposted. You can actually see the numbers that I was discussing. Have a look again, at my previous blogs (This is a video with sound).

The SGX Nifty suggests a 100 point gap up. That is strong, bubble like momentum. Traders have two options : (a) Buy the gap, or (b) fade the gap. Such a large gap does not offer much more prospects for intra day gains. The possible trades are, (a) buy a severe intra day dip, or (b) sell a rally that begins after the gap open. The selling is done only if the Nifty continues to rally after a big gap, then begins a consolidation at higher levels. The consolidation acts as a stop loss for the sell.

The Market does seem to be going beyond itself, before the election.