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Last week I wrote about smoothing out volatility by increasing chart time frames. I have demonstrated numerous times this week in real time the benefits that this ideology creates. However, no matter how much volatility is smoothed pullbacks and periods of congestion will still be created. In this edition of the Hawkeye Traders Weekly Newsletter I will examine and define pullbacks and congestion zones and teach a technique through Hawkeye ChartTools that will keep us out of the market during these areas that many times pose difficulties for traders.

All trends regardless of chart time frames have pullbacks. As intraday traders we must understand this concept and utilize the information appropriately. When a market starts to move in one direction it establishes a trend. Once a trend is formed we must expect a pullback. Pullbacks, also known as retracements, are periods where price moves away from the trend. These retracements can be caused by hedging, profit taking or heavy other time frame selling. The important part is we must be able to see them in order to learn how to avoid them. When I see a strong up move and then a red trend dot I immediately ask myself if I have a reason to fade or go against the underlying trend of the time frame I am currently trading.

Chart 1

Chart 2

The Chart 1 is an 1800 tick chart of the Russell 2000 symbol TF. Chart 2 is a slightly magnified view of Chart 1, since it is a bit hard to read. The blue rectangles represent pullbacks. On March 1, 2010, we had a strong up move from a period of congestion. In Hawkeye Trading Terminology we had a strong congestion breakout. This breakout to the long side started a short term long trend. At the end of the day we had a red trend dot with some red volume that came in on the Roadkill Indicator where the slow chart is set to 3600 ticks. Normally we enter a short position when the Roadkill Volume turns red and our fast time frame has red Hawkeye Volume, red Hawkeye Heatmap and red Hawkeye Trend Dot. However, in the first blue rectangle labeled with a green 1 (1 ) we have a strong short term trend and if we entered short here we would be fading that trend. In hindsight this is easy to say and harder to interpret real time as we are asking ourselves how do we know this market is not going to drop from this point?

When faced with this type of situation we wait for confirmation to take a short. The first filter we use are the Hawkeye Isolated Lows/Highs. In reference to the chart the first blue rectangle area has an isolated low on the same bar that we get a red Hawkeye Trend Dot and red Hawkeye Volume on both the fast and slow time frames. This would be an entry short and subsequently it would have turned out to be a minus trade. However, if we realize that we are in a short term long trend we would notice we were fading the trend and are waiting for a close below the isolated low to show strength to a possible down turn.

In example 2 the red trend dots never confirm with Hawkeye Roadkill Volume so we were never thinking short in this area. Example 3 never formed an isolated low so again we were never thinking short. In example 4 we never got a close below the first isolated low. It is also important to note in example 4 that this chart pattern represents a congestion period. At the end of the day on March 4, 2010, we get a close above the isolated highs with green Hawkeye Volume on the Roadkill entry and price has continued to move up since that breakout. This was also confirmed by the small green dot that alerted us to an aggressive Hawkeye Roadkill Entry.

If you look at the charts you can see these patterns form day in and day out and you can clearly see where the Hawkeye ChartTools can be utilized to keep us out of pullbacks and areas of price congestion. In the Trading the Hawkeye Method Room I demonstrate this filter on a real time basis. Not only do I show how to interpret this pattern real time, but I also show other filters that we use to tell us if we want to fade a trend or not. So if you find this information useful I would invite you to attend the trading room and learn the other elements that we utilize to keep us from fading the trend in strong markets or conversely allow us to take advantage of fading the trend when we have the highest levels of probabilities that the market will continue to move in the opposite direction.

Well I believe that is enough information for one week. Thank you for taking the time to read this letter and I hope you found the information to be useful. I hope you have a great weekend and I bid you farewell. Good Trading everyone in the coming week.

Anthony Begin
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