CANDLESTICKS WITH TRENDLINES

SPRINGS AND UPTHRUSTS

Most of the time, the markets are not in a trending mode but rather in a lateral range. On such occasions, the market is in a relative state of harmony with neither the bulls nor the bears in charge. The Japanese word for tranquility and calm is “wa.” I like to think of markets that are bounded in a horizontal trading zone as being in a state of “wa.” It is estimated that markets are in a non-trending mode as much as 70% of the time.’ As such, it would be valuable to use a trading tool that provides attractive entry points in such circumstances. There is a set of tools which are effective in such environments. They are called upthrusts and springs. They may be especially useful concepts when employed with candlestick techniques. Upthrusts and springs are based on concepts popularized by Richard Wyckoff in the early 20th century.

As previously mentioned, when the markets are in a state of “wa” they will trade in a quiet, horizontal band. At times, however, the bear or bulls may assault a prior high or low level. Trading opportunities can arise on these occasions. Specifically, if there is an unsustained breakout from either a support or resistance level, it can present an attractive trading opportunity. In such a scenario there is a strong probability there will be a return to the opposite side of the congestion band.

There is an unsustained penetration of resistance in Exhibit 11.12. Prices then return back under the old highs which had been “penetrated.” In such a scenario, one could short and place a stop above the new high. The price target would be a retest of the lower end of the congestion band. This type of false upside breakout is called an upthrust. If an upthrust coincides with a bearish candlestick indicator it is an appealing opportunity to short.

The opposite of an upthrust is the spring. The spring develops when prices pierce a prior low. Then prices spring back above the broken support area (see Exhibit 11.13). In other words, new lows could not hold. Buy if prices push back above the old lows. The objective would be for a retest of the congestion zone’s upper band. The stop would be under the lows made on the day of the spring. Trading springs and upthrusts is so effective because they provide a clear target (the opposite end of the trading range) and protective stop (the new high or low made with the “false breakout”).

Exhibit 11.14 is a good example of upthrusts with candlesticks. Day A marked the high for the move and a resistance level (notice how the hanging-man line the prior day gave warning of the end of the uptrend). The dual lows at L, and L, defined the lower end of the trading band. There was an upthrust on day B. That is, the prior highs at A were breached, but the new highs did not hold. The failure of the bulls to maintain the new highs at B was a bearish signal. Another negative sign was that day B was also a shooting star. Shooting stars are sometimes part of an upthrust. At such times, it is a powerful incentive to sell. As if a bearish upthrust and a shooting star were not enough to send chills down a bull’s back, the day after B a hanging man appeared! With the bearish upthrust at B we have a target of the lower end of the lateral band, that is, the lows made by L₁ and L₂.

Exhibit 11.15 shows that on May 1, a new high for the move as the CRB touched 248.44. On May 10, the bulls managed to nudge above this level by about 25 ticks. They were unable to sustain these new highs. This failure was an upthrust. May 10 was also a shooting star. It spelled an end to the prior minor uptrend. Thus, a short sale with a stop above May 10 highs would have been warranted. The objective would be a retest of the lower end of the recent trading range near 245.00.

As shown in Exhibit 11.16, the highs of April 5 overran the early March highs near $5.40. However, the bulls could not defend the new higher territory. This was an upthrust. Verification of the bearish aspect of this upthrust came via the hanging man in the next session.

Exhibit 11.17 shows in July 1987, the CRB found a base near 220 via a harami pattern. The lows made by this harami were successfully tested by the following week’s long white line which was also a bullish belt hold. In the third quarter of that year, the 220.00 level was temporarily broken. The market then sharply rebounded and, in the process, created a hammer and a spring. The objective based on this spring was a retest of the prior highs near 235.

Exhibit 11.18 indicates that the early January lows were perforated in late February. The failure to hold the lows meant that this was a bullish spring. The day of the spring was also a hammer. This union of bullish signals gave plenty of warning to the technician to look for a return move to the upper end of the January/February band near $78. Interestingly, the rally stopped in mid-March near $78 at an evening doji star formation

Exhibit 11.19 shows that after a harami, the market slid. It stabilized at hammer 1. This hammer was also a successful test of the prior support near $.50. Another slight pullback occurred on hammer 2. With this bullish hammer, the market nudged marginally under the summer lows (by 25 ticks) but the bears could not maintain these new lows. Thus a spring, complimented by a hammer and a tweezers bottom created noteworthy bullish evidence. Exhibit 11.20 reveals that during the week of March 12, soybeans touched a low of $5.96 formed a bullish engulfing pattern and rallied. On April 3, prices broke this level and made new lows. These new lows failed to hold and created a spring. Furthermore, the lows on that session constructed a bullish engulfing pattern.

Why do springs and upthrusts work so well? To answer this, refer to Napoleon’s response when asked which troops he considered best. His terse response was, “those which are victorious.” View the market as a battlefield between two sets of troops-the bulls and the bears. The territory they each claim is especially evident when there is a lateral trading range. The horizontal resistance line is the bears’ terrain to defend. The horizontal support line is the bulls domain to defend.

At times there will be “scouting parties” (this is my term and not a candlestick expression) sent by big traders, commercial accounts, or even locals to test the resolve of the opposing troops. For instance, there might be a push by the bulls to try to move prices above a resistance line. In such a battle, we have to monitor the determination of the bears. If this bullish scouting party can set up camp in enemy territory (that is, close above resistance for a few days) then a beachhead is made. New, fresh attacking bull troops should join the scouting party. The market should move higher. As long as the beachhead is maintained (that is, the market should hold the old resistance area as new support), the bull troops will have control of the market. An example of a “scouting party” is presented in Exhibit 11.21.

In late May, there were highs made at $3.54. Numerous bull scouting parties tried to get a foothold into the bear’s terrain above $3.54. They only succeeded in pushing prices above $3.54 intra-day. The bulls could not get a beachhead, that is, a close, into the bears terrain. The bulls then went into retreat. The result? A return to the bottom end of the congestion band near $3.45. A candlestick sign that the bears still had control of the market was the bearish engulfing pattern made in early June. The shooting stars on June 12 and 13 did not help the picture either.

A bullish scouting party also transpired in early April. By failing to hold above the mid-March highs, the bulls had to retreat. The result was a retest of the late March lows. This failure was confirmed by a bearish shooting star.