The "top out" pattern has been the setup of choice for the past quarter, for obvious reasons. To me the classic top out pattern is long upper-tails forming on the fourth and fifth bars, but failing to close above the OR (opening range) high. The smaller the real-body and closer to the actual OR high, the better (we will call this v1).
But a variation that has been working just as good - if not better - is when the third bar closes below the halfway point between the OR high* and the 50% retracement. If you look at charts posted over the past few weeks, you will see several examples of this variation (we will call this v2).
*note - I use OR high and morning's high interchangeably; moving forward I am going to [try and] use OR high as I have historically done.
Another variation that has been working well - but I have not tested over an extended period of time - is weakness in the first few bars and the inability for them to close above the halfway point between the OR high and the 50% retracement (as opposed to v2 cited above where price will close above the halfway point and then roll over to close back below it). Psychologically it makes sense, as it is working on the same principle - an early rally that fails to break through to a new high and begins to show weakness. I need to research the profit potential, though (we will call this v3).
With v1, the setup forms close to the morning high and I am looking for an initial move to the 50% retracement; I watch price action at that level to see if it is stalling or will continue down. With v2, I am looking for an initial move to the halfway point between the 50% retracement and the OR low (so, from the upper halfway point to the lower halfway point). With v3, I am looking for an initial move to the morning low and then I watch price action to see if it is stalling at that level or will continue down.
One of the drawbacks of v3 is that the entry is usually just above the 50% retracement; the rationale is that the weakness noted above offsets that drawback...but more testing is required to see if it happens consistently. Here are a few examples of v3 (entry was a break of the third bar low, exit was the FE):
Here are a few examples of v2 (entry was a break of the third bar low; exit on MRO was the FE, exit on BUCY was the halfway point between the low and the FE. Note that MRO presented a "beyond the FE" setup around Noon):
Here is hoping that next week will bring more long setups!
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