The Best Sign that a Support will Hold and will Produce a Bounce
Probably the first thing you find out about trading is that traders are focused on some levels of support and resistance. What traders call a support is a specific price level that should stop decline in stock price at least for some time. Sometimes support holds and price bounces after testing it. But sometimes price slices through support without any bounce at all. Every day every trader faces a big unknown which is whether support is going to hold and whether it is a good time to bet money on an upcoming bounce.
We were going to start a new trading week on Friday, February 4, 2022 after a big overnight decline in ES min and NQ mini futures. Nevertheless, we looked at that decline with a bullish bias that could surprise millions of other traders!
That bullish bias was based on analysis provided by a proprietary Monkey Cycle Trader Indicator for TradingView:
AS you can see, the indicator identified that both contracts were about to complete a down cycle and were ready to start a new up cycle. That chart and all other charts in this article were posted in a Premium Trading Chat Room available for subscribers of the indicator for no additional payment.
We had another strong argument in favor of a potential bullish turnaround that day.
The indicator detected completion of a stronger down cycle on 240 min timeframe.
However, a double support we got on 240 min and 30 min timeframes were not enough to consider it a favorable bullish reversal trading setup!
This is what I wrote for subscribers around 7–30 AM EST that morning:
“…ES and NQ are in down trend on 5 min. Therefore, we need it to complete the bottoming sequence, print “Strong Short” signal followed by “Cover Short” signal on 3–5 min charts”.
Please read about the bottoming sequence here.
This is how ES and NQ looks that moment:
Both dropped under support around 2–00 AM EST and had been in down trend move.
An hour later, as expected, the indicator detected completion of a corrective bounce and printed the “Strong Short” signal:
Paradoxically, the very last push down normally provides a skilled trader with a powerful predictive tool the best opportunity to make money on a fast relentless trending move! This is what makes that signal “Strong Short” my favorite one.
At 9–12 AM EST the indicator detected signs of completion of that final exhaustive thrust lower and printed the bottoming signal “Cover Short”:
It is remarkable that at that same moment NQ has tagged the support on 240 min chart:
The algo also nailed the bottom of the decline in ES-mini:
Essentially, we got a triple bottom when price stopped at support on 240 min, 30 min and 5 min timeframes!
When we get the first bounce off an important double or triple support the main question is how bulls will react to the first resistance on the way up.
We expected a new big up cycle on 240 min and 30 min timeframes, but price never goes up and down in a straight-line fashion. It keeps moving in zig-zags (you can read about zig-zags as natural rhythm behind any price move here).
Slightly after 10–00 AM both, ES and NQ, hit the first micro resistance on 3 min timeframe:
This is what I posted for my subscribers:
“…the first question is whether bulls respect a resistance or slice through it and start an up-trending mode confirming start of a new up cycle on 30 min and 240 min timeframes.
Or, alternatively, we can get a new resistance on 3 and 5 min, price turns down (more likely) and we start watching where the move down finds support.
We will be waiting for a new cyclical support to get printed on 3/5 min. A higher low would be a good bullish sign.
In addition, we need to see a cluster of down wicks on 30 min timeframe over the new support printed in ES and NQ on 30 min chart.
One wick is good but not a very strong bullish sign.”
By 10–52 AM it was clear bulls failed to break over the first resistance and price turned down strongly:
Despite that weakness I reaffirmed subscribers that the bullish scenario was still alive:
“…we need bulls to stop that bleeding over the morning lows”.
At 11–05 bulls started to get good news. First, the indicator detected completion of that micro down cycle in NQ:
The indicator printed a bottoming “Exit Short PB” signal.
Eight minutes later we got a topping signal for volatility:
That chart is a great example why “Strong Buy” signal is my favorite signal produced by the Monkey Cycle Trader Indicator!
What was extremely important is that decline in ES and NQ could not break under cyclical support levels printed on 240 min timeframe:
At 11–40 AM it became clear that the second bears’ attack against the support failed:
This is when I wrote to members of the trading chat room:
“Note, we have got the second long down wick slightly over support, a good bullish sign”.
After bears failed to break under support ES and NQ produced very strong rallies back up to a micro resistance on 3 min timeframe:
That was a clean long setup confirmed by a bottoming signal on NQ 5 min chart, bottoming signal on ES 3 min chart and a topping signal on VXX 5 min chart. The exit signal was test of a new cyclical resistance printed in ES and NQ charts on 3 min timeframe. That long setup would let a trader capture 35-point rally in ES and 140-point rally in NQ in a matter of 30 minutes!
Did we have any good sign that made this particular setup worked out so well? I think we can identify at least four reasons why we got such a strong bullish reaction after test of that support:
In the next lesson I will explain how we played a breakout setup the very same day!
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