Compression with a bounce to form HH/LL then a pullback and reversal
This is a common reversal pattern on the Dax:
- Market compresses into a support level (200-208 area)
- Then it bounces to make a HH (higher high) – this is circled in blue on the chart.
- After the HH, we see a pullback (PB) towards the key level and then it makes a nice reversal candle/PA (shown by the arrow)
- That is the signal to go long with a stop below the low
Often the first bounce higher goes on to makes a false break lower too and in this case we see engulfing PA on the 1m. The area circled in red engulfs the compression into the level, then retests key level and bounces (blue arrow). This is similar to the Broken Triangle Reversal pattern.
Q: Is this true for a reversal to the short side as well?
A: I mainly see it on the long reversal
Fast move into compression and then break out
Price compression is simply the range squeezing down to the point it can’t squeeze any more so has to pop. Generally, the longer and tighter the compression, the bigger the pop. Here we have clear resistance at 270, and price is compressing into that resistance and making HLs. The market is running into a level, and the reversal away from it is getting smaller every time – until it eventually breaks.
In this sketch you see a key level in read. It is more likely to break out and hold if price works its way slowly into the level. A faster move will often see false break (overshoot) and then a reverse.
Once we know a key level is active, (i.e. price is responding to it) and we see reactions form the level make LHs with every bounce, we can get ready to short.
At some point, the market will run out of energy and simply won’t be able to bounce higher – this and a beak of the lower gives us our setup and a nice tight stop for the short.
Compression around a level
Here’s an example on the Dow
This is a different kind of compression trade – rather than compression into a level, it’s compression around a level. Once the compression breaks, you take the break with a tight stop just the other side