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Ten Year Note - Anatomy Of A Trade. Somewhat Classical Buy.

Tuesday  22 March 2011

 When a market has an upside breakout, price will often retest
the breakout area.  This retest is one of the safer trades to make. 
Safer, better, less risk, just generally a better quality trade.  On
the retest, price will tend to show smaller range bars, and volume
will decrease, evidence of a lack of selling pressure.  That is the
ideal retest.  Markets are not always ideal, so some flexibility must
be allowed, but not much variance.

 We spotted this trade potential Monday evening.  The thought
was, if price can retest the wide range, high volume bar of the
21st, [shown on next chart], then we may have a decent candidate
for a purchase, at least for a short-term consideration.  You can
see the crisscross horizontal line drawn across the 120.015 area
from initial resistance throughout January, to now becoming
potential support in March.

 The tiny bar at the end is the beginning of the evening session,
Tuesday, going into Wednesday's day session.  Two bars before
it was Monday's activity.  It is a wider range bar than the one before
it, but volume was less than the previous bar.  That day's close was
just below mid-range the bar, so there was some evidence of buying
on the low, which is also the potential new support.  The relative
ease of downward movement would suggest a lower price, next day.

 The next day was Tuesday, second bar from the end, and it was a
much smaller range on volume about equal to Monday's.  The same
volume produced a much smaller range.  What this says is that
buyers were meeting the effort of sellers, keeping the range from
extending lower.  That is the qualitative difference between the two
bars, and an important distinction occurring on what may be support.

 The most important piece of information is the trend.  When you
trade with the trend, the proverbial wind is at your back.  Since early
February, the Ten Year has made higher swing highs and higher
swing lows, essential elements of defining a trend.  Should Tuesday's
low hold, it will be the second higher low and confirm the observation.

 We turn to the intra day chart to see if an entry is available.

 

TYM D 22 Mar 11 


 It is clear from this 30 minute chart that the smaller time frame
trend is down.  You see lower highs and lower lows.  What caught
our attention was the high volume spike bar on the 21st, arrow 1. 
It is right on potential support, and it may be stopping volume. We
need to see this intra day down trend end and show signs of a
turning point.

 We want to see two things: 1. a low volume retest of that bar, and
2. price breaking the downsloping supply trend line, thus confirming
that the intra day trend is turning.  At arrow 2 is the low of the day.
Three bars prior to it was a small range bar with a close above mid
range, followed by two higher bars.  It was at that point we viewed
a retest had occurred, and we went long at 120.015.  Turns out, it
was an early purchase.  The stop was placed under Monday's low,
so that allowed for another possible low, and that was at arrow 2. 

 After arrow 2, five bars later was a retest f that low.  This is what
markets do al the time, test and retest price/support/resistance
areas.  If the low held, the expectation was for price to break the
supply line off the highs. 

 Why not wait for the breaking of that trend line for the confirmation
we just mentioned?  The purchase at 120.015 was at what we call
the danger point, where price is close to a swing low that can
either hold or break lower.  If the analysis is correct, buying at the
danger point means less risk.  Waiting to buy the breaking of the
supply line means to buy at 120.04, increasing the risk, but just
slightly in this particular instance.

 As the evening session develops, price is around 120.05, breaking
the supply trend line, and showing a turning point to the upside for
the intra day trend.  Note also that after the high volume spike bar,
at arrow 1, price stopped going lower within the channel and began
gravitating toward the upper channel line, to challenge it.  That was
another reason buying at the danger point was not an unreasonable
move.
 

 We also know that the daily trend is up, so going long is in harmony
with the higher time frame trend. What we did was find a potential
support level where the intra day trend was likely to stop going down.
Whenever you can catch a turning point, at support, and that turning
point means price is turning back up in harmony with the next higher,
and more controling time frame, you have all the ingredients of an
excellent trade potential. 

 In addition to all the above, as we stated from the outset, a retest
of a breakout is one of the safer trades to make, and all of the
above occurred at such a point.  Somewhat like a perfect storm. 
Now, this does not mean that the trade will work or even that it will
make a lot of money.  What is does mean is that if one's trade
selection is made under conditions like this, one will consistently
make money in the markets.

 Isn't that the name of the game...not that we see this as a game.

 

TYM 30m 22 Mar 11