Figure 3, which shows the sterling/Deutschemark cross-rate, contains several excellent examples. You can see how many times prices either approached or penetrated real-body support and resistance points but were unable to sustain those levels. Time after time, an attentive trader could have entered positions counter to the prevailing market action and would have done well. There are two noticeable exceptions, however.
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FIGURE 3: STERLING/DEUTSCHEMARK CROSS-RATE. The sterling/Deutschemark cross-rate contains several excellent examples. You can see how many times prices either approached or penetrated real-body support and resistance points but were unable to sustain those levels. Time after time, an attentive trader could have entered positions counter to the prevailing market action and would have done well. |
The first came in late December 1994, when the market finally broke down out of its range. Two things should have been noted that might have kept you out of a trade. One is the double top, or tweezers pattern in the candlestick vernacular, which took place about 10 days prior to the breakdown. That would have been your first indication that the trend was probably toward lower prices. The second indication came two days before the breakdown in the form of a shooting-star pattern, followed by a large negative real-body candlestick. This was another signal of lower prices.
The second exception was in January 1995, when the market again broke down after a consolidation. This, too, probably could have been avoided. All indications were signaling a bearish trend. That should have kept the careful trader from trading the doji day just prior to the breakdown. The doji, however, might have caused some confusion.
In addition, look at how taking those positions against the prevailing action is a great way to enter a new longer-term position. One glaring example of this took place early in January 1995, just before the second breakdown. After rallying for three days, the market approached, but never broke, real-body resistance. Prices did not stop falling until they were about 600 points lower, less than a week later.
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