The Spring Compression

Most traders who base their decisions on pitchforks, find it hard to follow their strategies when price starts to fall out of their forks. They often switch to another fork (Schiff or modified Schiff) or an opposite fork, losing their confidence in the pervasive trend that may have still been in force. Sometimes all that happens is a phenomenon that I call 'the spring compression'.

Here is a chart of GBPCAD. Price is in a strong up trend, following a regular Andrews pitchfork.

Now, price has reached the lower parallel of the median line. What is it going to do next? It breaches the lower parallel but somehow manages to return back within the fork.

The question everyone asks at that point is "Is the fork still working?" or "Is the trend still up? We usually draw an outer sliding parallel at the last lowest low and see what happens next. But... oops! Price is going down again, breaking below the sliding parallel, but again it is unable to stay below it.

So, what do we do next? Do we draw yet another sliding parallel at the low? Or is it already a down trend? Don't we have lower highs and lower lows? Let's add a down fork to see what the bearish trend might look like.

As a sidenote, we also notice we're at a psychological level of 1.80000. As new candles develop, we see that price doesn't seem to be able to close below that level.

Price respects the sliding parallel and doesn't make much progress to the down side, esp. with regard to the highs. Price keeps developing in a horizontal range, making no progress in terms of both the up fork and the down fork.

It develops that way until it reaches the upper median line parallel of the down fork.

Next price breaks out of the down fork to the up side, taking out two minor highs, but actually making little progress.

This is when it tends to return to the upper median line to find support, where there was resistance.

And so it does. Now, what we've been watching here is an example of a "spring being compressed". By a "spring" I don't mean a season, of course, but a mechanical coiled, steel device that stores energy.

At some point the spring can't be compressed any more and here we're slowly approaching that point. When the spring is released though, the next thing you know is the spring being back in its original shape (i.e., equilibrium length). It simply pushes back obeying Hooke's law, which states that the force with which the spring pushes back is linearly proportional to the distance from its equilibrium length.

So, the larger the distance and direction the spring is deformed from its equilibrium length, the greater the resulting force vector, ie., the greater the magnitude and direction of the restoring force the spring exerts. I hope it's clear that what it means for us here is that the longer the energy coil lasts and the deeper the correction goes, the stronger the reactive rally is going to be.

And quite often it works in a way that the longer the trading range continues and the harder the price is being pressed down, the stronger the prospective rally is going to be.

And in our case the process repeated itself again and again.

As you can see now, it turned out that it was worth staying long in this market. But what was the key factor that should make you hold on to your bullish view?

OK. Here is a bonus for you. There are two of them that I find salient, but let's look at one few of them in more detail. The first one was already mentioned. It is a specific in this case level - a handle of 1.8 - an objective support level, clear for everyone to see with no closes below it.

However, the second one I've kept hidden from view so far. It is the rule of halves (1/2 or 50%) and doubles (2 or 200%). What is it all about?

Price tends to respect the 50% retracement and develop twice as much as it did in the range before. Look how the range at the up side doubled to the down side.

Notice that price found support at 50% retracement of the trend contained by the purple fork.

Also notice some other examples of price following this rule. First at the top formation.

During the trend resumption.

And in the next stage of this trend.

And also later on, when price continued to develop in a horizontal trend.

I hope you found this information useful.
Good luck in your trading!

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Disclaimer:
There is a very high degree of risk involved in trading forex. I assume no responsibility or liability for any trading or investment results. My posted statements and charts may unintentionally include inaccuracies. All content posted is for educational purposes only and is not a financial advice. The presented set-ups are not solicitations of any order to buy or sell. Rather, you should use the information only as a starting point for doing additional independent research, your own due diligence, in order to allow you to form your own opinion regarding trading decisions. No assumption should be made in relation to the performance or accuracy of the methods shown. No claims are made as to the success or profitability of any of my posts.

The AUD/NZD Analysis (per mid-June 2014)

First let's look at the big picture - the monthly chart. The pair AUD/NZD seems to have found strong support at the prior lows of the years 2004-2005 (see the lower grey dashed horizontal line), which is just above 1.05. It's still within a big down trend though - it's well below the bear trend line and it hasn't even retraced by 23.6%. Neither has it risen to the upper border of the 2004-2005 range (the upper grey horizontal line). So at this point the question you might ask is: Is the bear trend so strong or has the correction only started to develop?

Now that we know that price is sitting at a strong support level, let's look at this down trend in more detail. For that purpose let's use an Andrews Median Line Set - the basic fork. We observe that the ongoing correction abruptly ended on the Median Line. It's a very common occurrence - price tends to respect the median line upon approaching it both from above and below. However, previously this very Median Line once acted as sloped support (price bounced off it Sep. 2011) then as a sloped balance line (price oscillated around it in Sep. 2013). Now it's acting as resistance. We can also see that price broke out of the downward channel, which means that current correction is more serious than the previous one and the down trend has taken a pause.

Switching to the daily time frame, we can see that there's a horizontal support at the lows at 1.053 and a switch-back kind of resistance (coming off the prior lows) at 1.12. We also notice a horizontal multipivot line at 1.091.

We can also notice that one swing high has been taken and that there have been no new lows since Jan. 2014. This behaviour can be best encompassed with a Schiff Median Line Set (pink). Price has found resistance at the upper MLH ('H' stands for parallel) and at least a temporary support at the median line. It's also got a blue horizontal S/R line that may act as a magnet on price.

Taking a closer look we notice that price has been following the blue Median Line Set, hit the Median Line twice and then sharply declined. The selling force was so strong and vehement that price failed to find support at the lower MLH, broke through it and stopped falling well below it. This overshoot doesn't mean though that this blue pitchfork and its derivative slope aren't working. On the contrary, we expect price to continue following it, be it to the lower MLH or even higher - back within the fork. The added sliding parallel at the low may be breached once or twice, but we'll draw an extra parallel as long as price doesn't close for good below the current low (which is at 1.0812).

Upon our further observation we can see that price has also found support at the half-way level of the up trend which is also an argument for the up trend's continuation.

However, another close-up reveals an important piece of information - on an hourly chart we can see that price is trending down, following a down fork (red). On the other hand, that market is actually in the process of correction - it's not making further advancements in terms of the slope of the red fork, but keeps approaching the red median line.

Now we're at a point, where we can get little new information. We can see higher highs and higher lows. But they're no big deal - corrective in nature and making little progress above each other. Hasn't it found resistance at an internal parallel? Yes, it has, but it has also found at least a temporary support at the red lower MLH. So is it going to find resistance at the red median line, if it zoomed through it last time? Maybe it won't and it will go down or it will zoom through it again to find resistance at the blue horizontal line. We don't know it yet. 

What we know is that:
1) we are above the long-term support,
2) we are in a long-term bear trend, which is in the process of a substanstial correction,
3) the long-term accelerating corrective process was met with resistance and gave in,
4) the sell-off was overreactive in nature, so it marked a low that couldn't be matched during the next three swings down.

Thus both the strength of the long-term correction (to the up side) and the news-driven sell-off (to the down side) provide evidence in favour of some kind of return to balance, which having weighed-in all of the above, speak for a return to the red down sloping ML or the horizontal blue multipivot line.

13th June, 2014, 14:00 GMT.

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Disclaimer:

There is a very high degree of risk involved in trading forex. I assume no responsibility or liability for any trading or investment results. My posted statements and charts may unintentionally include inaccuracies. All content posted is for educational purposes only and is not a financial advice. The presented set-ups are not solicitations of any order to buy or sell. Rather, you should use the information only as a starting point for doing additional independent research, your own due diligence, in order to allow you to form your own opinion regarding trading decisions. No assumption should be made in relation to the performance or accuracy of the methods shown. No claims are made as to the success or profitability of any of my posts.