Price Action: Microchannels (Part 8)

When judging the response to a High 1/Low 1 breakout, you must consider the context.
If it is in the early phase of a trend, even if only a hesitant bar appears after the High 1/Low 1 breakout, the market may still continue in the original trend direction.
But if it is in the late phase of a trend, a weak High 1/Low 1 breakout response is more likely to develop into a second entry opportunity in the opposite direction.

Examples:

• After a bear microchannel downward break fails, the first bounce produces a High 1 buy. If continuation is very weak, it will very likely develop into a Low 2 sell bear opportunity.

• After a bull microchannel upward break fails, the first decline produces a Low 1 sell. If continuation is very weak, it will very likely develop into a High 2 buy bull opportunity.

When the continuation pattern after a High 1/Low 1 breakout is clearly poor, this is often an exit signal:

• After a High 1 breakout, if a strong bear signal bar appears and the market is at the end of a trend or in a consolidation environment, the long position from the High 1 breakout should be exited.

• After a Low 1 breakout, if a strong bull signal bar appears and the market is at the end of a trend or in a consolidation environment, the short position from the Low 1 breakout should be exited.

Low 1 sells can avoid some of the traps of limit-order trading to a certain extent, but they are not perfect. You must understand the characteristics of when they fail.
If you take a Low 1 sell, observe the market reaction after the Low 1 breakout. If a strong bull bar appears after the breakout with continuation, especially at the bottom of a trading range, extra caution is needed, and you must know when to exit the trade.

Pullback Depth and Quality
Successful High 1/Low 1 trades ideally occur within one to two bars after the breakout. For example:

• A bull microchannel is broken downward and immediately fails.

• A bear microchannel is broken upward and immediately fails.

In such cases, the counter-side does not encounter much resistance. The breakout is just a brief attempt that quickly fails, and then the opposing force steps in.

Al Brooks's advice is: typically trade the bar that created the breakout.
In a bear microchannel, if a certain bar caused the breakout and it fails, go short below this bar.
In a bull scenario, go long above the corresponding bull bar.

Therefore, in a bull microchannel, it is best to buy above a bull bar; in a bear microchannel, it is best to sell below a bear bar. Even simply following the rule of "trading above or below the prior bar" provides some protection.

Number and Nature of Counter-Trend Bars
The number of counter-trend bars in a pullback, and whether these bars are trend bars or consolidation bars, are important references.
In other words, you need to determine whether you are getting a directional move.

For example:

• A forceful rally after a bear signal.

• A forceful decline after a bull signal.

Even a doji, as long as it represents a failed breakout, closes near the high, and is quickly broken in the opposite direction, is still a directional move. This is completely different from a situation where six sideways bars appear after a breakout.

Therefore, when looking for a High 1 buy, do not choose one that only appears after three dojis. Instead, choose the scenario where the breakout fails and is immediately engulfed in the opposite direction.