Before we get to stage 3, which is where the signal actually rolls through to the daily chart, I wanted to relate what we’ve seen to The Art of War by Sun Tzu.
In part 2 of this series, we described the point of reaching the daily resistance as a bull/bear battleground. The clip featured above (2:01) is from a week later (July 20th), and we can see that prices have not broken out to stage 3 yet. In fact, prices almost went back to even, putting in a low of $90.78
I wanted to address the idea of scaling out at this roadblock, because it represents the most trying period of managing such a position. For me, this calls to mind the 2nd chapter in The Art of War, that a wise general makes a point to forage on the enemy. “One cartload of the enemy’s provisions is equivalent to twenty of one’s own”
At this point in the trade, we had looked to buy as a continuation of the weekly trend, yet between our buy signal and the continuation of the trend, there is an intermediate roadblock – the daily resistance. For the last 2-3 month, prices were down off of their June highs.
As you can see above, anyone long from above the line is still in a drawdown at that point. The potential long position from $90 is not out of the woods yet. But, by taking a bit off at $95, it ensures that the outcome is a winner even if the stop isn’t at break even yet. Stage 2 is where more people get shaken out of the positions, and if prices start to run again, it can be difficult psychologically to reenter if you didn’t have a winner first.
The next post will finally get into when the signal rolls through the Daily chart, into the 2nd roadblock & beyond…
Also, with this series, we will be holding a 3-day sale for ‘back to school’, beginning August 17th. Summer is ending, which means the kids are headed back to school, and traders are also returning from vacation. That makes this the perfect time to get back into the swing of things before Q3 gets going. More details coming soon