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As this week’s idea has gone by, you may have noticed that Nasdaq’s trend line has been changing. This is because of what’s called inner trend lines versus outer trend lines. We’re currently on the outer trend line, which essentially means that if the buyers don’t take control right now, then we could see an overall reversal.
Trend lines, which refer to the market’s overall direction, allow us to recognize three important things:
During the beginning of a trend, the market sometimes picks up speed, so instead of making higher highs and lower lows, inner trend lines make higher highs and lower lows inside the price. This means the market is using this as a low u-turn. If the inner trend line breaks, the market moves toward the outer trend line.
When the outer trend line is hit, the market is anticipated to rally back up. These angles are also called channels, which helps us see how the market is ranging if we were to erase the inner trend lines and draw the top of the channel.
We don’t often see the lows of the outer trend lines, but when they emerge, they’re big producers of opportunities.
Looking at the current daily time frame, you’ll notice how the market has u-turned five times, nearing its sixth. It’s been u-turning on or around the bottom level since June of last year and has continued on for almost 10 calendar months up until March this year.
We had a great run buying the inner trend line, but since it has been recently broken, there doesn’t seem to be anything that could push the market up. If we were to break the angle of the inner trend line, we could have a bear trend or a bear market. In this scenario, either buyers are going to take control or a potential sell-off will occur, and we’d have to wait for the next low price.
Whether it’s the daily time frame or the larger time frame that’s making higher highs and lower lows, as it moves to an upward angle while we’re at the bottom, the goal is to look to buy the area on or around the bottom level. However, considering this is a daily time frame, experts don’t recommend buying when the market’s still falling. People make the mistaken notion that they should buy because it’s low, but the wiser move is to buy as the market is heading up.
That said, avoid buying the Nasdaq simply because it’s at a low price and we’re at a known level u-turn. This is just guessing the u-turn and hoping that buyers take control because you can see the sellers have been in the retracement and the market’s been going down. This will make risk and draw down very hard to control.
Instead, look at the one-hour time frame. If, for example, a one-hour downtrend is going to occur, then we want to wait for the one-hour time frame to enter into the buy zone and start looking to buy the market on the way up to the new bullish trend.
In this case, it may be better to give up some profit opportunity to gain better entry.
For the Nasdaq 100, it’s like a now or never scenario: if buyers could take control, it’s the time to buy. If we break below that level, this could have a major sell-off, and we can either wait for the sell-off to be done to buy the way back up or take advantage of it on the way down. But as long as the market is above the outer trend line, look for the one-hour entry into the buy zone before looking to buy.