Remember that saying "what happens when an unstoppable force meets an immovable object?" There is no solution, right? Well actually there is sort of a mathematical solution: The "unstoppable force" implies that the force is constant and since F=ma and at the point of collision acceleration approaches zero, and the and to preserve the momentum the mass of the object grows infinitely large.That's pretty cool if that unstoppable force was a jelly donut or something delicious--but I digress. Ok so what happens when a support that all the bulls are buying off of meets a resistance that all the bears are shorting off of?
Something much less tasty than a breakfast treat. You get "consolidation." What is that, you ask? Well that's technically equilibrium in the market place. That's mathematics of algos fighting each other and us fighting each other until we've consolidated the war right to the final battleground.
Why is this important? Well firstly here is the lowest risk to place a bet no matter what you are. And this means that your certainty of your trade goes way up here. Bull or Bear, you short or long at the SAME SPOT and just exit the trade when you are wrong and the other side wins.
Here's an easy way to see it before I go on. Have a look at the SPX which is trading beautifully up to a long standing resistance today and almost right into consolidation around this 2020 level we called out a month ago. I think it brushed 2011 today... but when you are good at the TA part of things, you can look for these consolidation points well in advance. It's going to squeeze ever so tightly into that triangle.
Or how about oil. Same thing. Today it so predictable traded to it's path of least resistance up to $38.11, which we weirdly accurate in calling as well. It's not too hard to set this up, it's just drawing lines after all.
So why is consolidation a low risk trade? Pretend that the consolidation point of XYZ was $20 and you were a bear and your friend was a bull. You short at some point close to or above $20, and he longs at some point close to or below $20. One of you will be way right and the other way wrong. If the trend breaks to the downside, congratulations, ride it--it will be fun. And your friend? Well if he's stubborn, he will lose money likely day after day after day, because this trend is likely permanent after the break. What he should have done is stopped out at $19.80 (1% loss) and just took the hit, maybe even joined you on the trade.
The certainty goes up because you know that this is the determining point of a greater trend. So in consolidation it is in my opinion the BEST place to trade. Draw the lines, make a bet, tighten your stops around them, and get out when wrong.
Consolidation is like a game of chicken, eventually one side will buckle. But before that happens just know that nobody, and I repeat NOBODY can predict what will happen after consolidation. So don't be fooled by people who say that can. It's a pure as day 50/50 gamble right here, and you get to play roulette with the fundamentals. If you think they are bad, take the short bet. If they are good or you believe the market will trade up then take the long bet.
And remember that if you were wrong and the trade breaks in the other direction, please get out. You will thank me later. And remember that it is required by the TRADING LAW OF THE UNIVERSE that I don't tell you what will happen, I don't know. Nobody does. I'm betting just like you guys are. And in case you care, my bet is short because fundamentals are bad in my opinion. But who am I? Don't listen to me--I'm just some guy from the internet.
No matter which side you take, exercise discipline and as always, stay liquid my friends.
Submitted March 07, 2016 at 08:37PM by gabriel87120 http://ift.tt/1U9e6eK
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