Tramline Trading: A practical guide to swing trading with tramlines, Elliott Waves and Fibonacci levels by Burford John

Author:Burford John [John, Burford]
Language: eng
Format: azw3, pdf
ISBN: 9780857193957
Publisher: Harriman House
Published: 2014-07-13T16:00:00+00:00

3.6 Trading the kiss and scalded cat bounce

When a tramline has been broken and the market has moved outside the trading channel, the market will very often come back to approach the line and make a kiss on it before saying farewell and resuming the new trend. These pullbacks can give you a great opportunity to jump on board the new trend if you missed the original trade signal at the line break.

A dramatic example in crude oil is shown in Figure 3.6.1.

Figure 3.6.1

I have a superb trendline with at least nine accurate touch points. This makes it a very solid line of resistance with so many touch points. The upside break came on 21 November and the market rallied strongly. Note that the upper tramline is lengthy with many accurate touch points, which means that we can expect a mass of protective buy-stops placed above the line by those traders who have flocked to the short side along the way. These shorts have noted the strength of the resistance every time the market has rallied to it and feel confident that next time it gets near the line history will repeat.

Normally, that is the correct trading stance as the market is in a downtrend and selling at or near the trendline is a low-risk strategy. But lines of resistance do not continue forever and this large accumulation of buy-stops above the line provides the fuel for the vigorous rally following the break. Evidently, history does not repeat indefinitely.

But the market did not continue upwards immediately; instead it fell back for a kiss on the line.

I find that this kissing behaviour is very common and allows for a second chance to position for the change of trend. Note that the kiss was an accurate touch on the upper side of the line which was resistance before the break but is now acting as major support.

That was a second bite of the cherry to position long. Now, at the kiss, the market could have broken back underneath the line. That would have given a major failure signal – and an excellent place to enter a protective stop in case the kiss was really a brush-off! It is also an excellent place to look to position short following the failure of the line to act as support. A stop-and-reverse order could also be used (from net long to net short).

The rapid move up after the kiss I call a Scalded Cat Bounce, in honour of the well-known term Dead Cat Bounce. It is as if the line is acting as an irresistible magnetic force, drawing the market back to the line after the break and now at the kiss, in a reversal of polarity, providing an opposite force propelling the market away from the new line of support.

When you see a trendline or tramline with many accurate touch points, you can usually expect a large accumulation of stop loss orders starting at the other side of the line and a consequent sharp move covering many pips.

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