Please Note: Blog posts are not selected, edited or screened by Seeking Alpha editors.

Bringing Common Sense To Trading Part III

In a prior Chart of the Week (COTW) titled Bringing Common Sense to Trading Part I, I explained how to determine turning points and continuation points with price action alone. This week I am going to show why prices trended as they did Friday.

In that prior COTW, I also told you that price oscillators, various other indicators and drawing lines to determine turning points or support and resistance have nothing to do with prices reversing when they do. Friday's drop should reinforce that fact for you. To an extent, these analysis tools do have a self-fulfilling prophecy at times since so many people have been taught to believe the fallacy and use them.

The internet based online trading education industry perpetuates these hocus-pocus indicator based methods. Not much has changed over the years. When I started to learn about trading the markets there was no online education, since there was no internet. However, there were mailed letters that gave recommendations and some education. Like most online educators now, those letters also used the indicator mythology.

It's not easy getting started with so much information to sift through about how to use these types of technical analysis to trade and invest. I did not side-step the learning and use of indicators, but I did eventually see the truth. Through these COTW letters and our other services I hope you will see through these deceptions that create confusion about price movement.

Okay, let me explain what happened on Friday.

Before we get to Friday, above is a chart that I posted at the Pristine Facebook Fan Page and the Group Page last Wednesday. In it I showed why sellers would show up the next day, and they did. I also said that ES (ES is the e-mini contract for the S&P 500) retraced further than I thought it would, but those Topping Tails (TT) suggest that short-sellers are waiting to pound it again. This alone did not suggest or predict how much prices would fall on Friday. However, what made that possible was the way prices moved up to the area of the prior TTs.

The key here is the fact that there is virtually no overlapping of the candles on the way up. Each candle started at or very near the prior candle close and did not retrace back into the prior candle. In other words, this is a continuous fluid movement. There is no uncertainty among the majority traders. Prices are going up; buy or get out of the way!

This arrangement of candles displays strength, power and momentum. But if that is the case, how could prices fall as far and as hard as they did? While this arrangement of candles does display strength, it is the weakest link also. As I have explained in the past, one of the most powerful concepts to understand is that of supply and demand. Where sellers and buyers are and when there is a Void of them.

The way prices moved up into the supply area and the TTs (little to no overlap between candles) it created what I refer to as a Pristine Price Void (PPV). When prices move upward so fast there is no support under prices. There are no pullbacks or sideways consolidations. So there is nowhere to buy a pullback based on a price support as a reference point (demand area). There is a Void of support or demand because prices moved higher so fast. In addition, as current prices move sideways over time they move away from any small support area that might be there. This makes any small support area irrelevant.

This is a common question students have. What about that small area of price support? What is more powerful or meaningful, that small area of consolidation or the bearish daily time frame and intra-day bearish shock? It's the weight of the evidence to consider as a whole, not one piece of information.

Pristine Tip: A truly strong momentum move does not need support. It creates it. I discussed this in the COTW Bringing Common Sense to Trading Part I. Look for momentum moves that begin from a consolidation and have a PVV overhead. Not moves that end at the top of a range.

In the chart above, I've shown the daily time frame at the upper left and the 60-min. time frame. In the 60-min. you can see how little congestion (stall in prices moving higher) there is, especially on the Tuesday the 16th. As prices moved sideways and away from what little intra-day overlapping there was, it made those areas less relevant as a reference point of support.

The essence of a Head and Shoulders top is that the upward move has ended when the new high fails (the head) and that the time moving sideways (the Shoulders) signals distribution. That price pattern creates a Void below. Also in this example, there is a shock that occurred on the 18th and confirmed the bearishness of the bigger daily picture.

Let's assume that you had no idea of the bearish big picture and potential for the larger decline. It's conceivable that you could have thought that prices have fallen a lot and would bounce on Friday and looked for long trades. Well that's fine, but unless the price action becomes climactic near a prior support area or there is an actual trend change on the time frame being traded (in this case the 5-min.), there would be no objective reason to buy. This is a rule all Pristine students and prop traders are taught from the start. Include it into your trading plan and it will eliminate a lot of unnecessary loses.

I hope this COTW has helped you understand why prices moved as they did on Friday and see that the commonplace indicator based mythology is unnecessary and misleading.

I will be presenting a Free Workshop on Tuesday October 30th. At it I will be discussing what we covered today and other Pristine trading strategies. It will be similar to the coaching sessions I do with students and hope to talk to you there. Also get into this week's workshops and keep up the learning.

All the best,

Greg Capra
President & CEO
Pristine Capital Holdings, Inc.

Pristine - A trading style often imitated, But NEVER matched!