CHAPTER 9

SHARK ATTACK
 ee
STRATEGY #6: SH
ARK ATTACK
At any one time,
a Great White has
aligned in rows. The more than 3000 se
Great White is the rrated tazor-sharp
ter, possibly to get only shark that wil] teeth
a view of its prey Poke its head out of
completely jump ou before attacking. Th Wa-
t of water usually ey've also been kn
catch a fast-moving when racing upward own to
meal. | don’t know s from deep wate
about you, but this r to
sounds to me like
the
Whether I’m lookin
g at an intraday,
an interesting rela daily, Weekly, or mo
tionship around sw nthly chart, I’ve ob
Proaching the most ing high or low served
recent Swing high points. When Price
retracement level. If or low Point, it face is ap-
the .786 retracement s a key decision at
not continue quickly is violated, then Pr the .786
to the next Fibonacc ice will more often
sion. Although that i levels between than
is a critical part of the 1.272 and 1.618
tunity I’m looking the Shark Attack St ex ten-
at. To the untrained rategy, it is not the
a low point is viol eye , it would Suggest op po r-
ated and further further downside wh
where the shark atta upside when a high en
cks. It comes out point is violated.
it slides back into of the water with Th is is
the water. Sliding power, but once it
to a reversal. That ba ck into the water in tr “a tt ac ks ,”
slightly lower low ading terms translat
or slightly higher hi es
gh is a trap, in a se
nse, Yes,

1, What the relationsh

ip is between the
points. .786 and the extens
ion levels at swing
2. Hitting extension
levels like the 1.272
“stretched” Price ac and 1.618 of Previo
tion and a tradable us swings represen
around these extens Shark Attack revers t
ion levels, al typically occurs
3. The more Fibona
cci extension levels
the greater the likeli that come together
hood for a tradable in a tight price range,
reversal.

155
156 Chapter 9

|| Shark Attack—Long Setup |

1.272 of B:C

Price Activity
 Ss

Shark Attack 157

Rules For Buys (Shorts Are Reversed):

1. Swing point low A is identified.
2. Once a low point A is established, price rallies to form a high point B.
3. This is where it gets interesting. As price approaches the .786 retracement of
swing A:B, a potential momentum trade is setting up. Basically, if price goes
below the .786, it is likely to decline to the 1.272 to 1.618 extension of swing
A:B. Many times, this move from the .786 to the extension levels happens
very quickly. So this presents short-term momentum traders an opportunity.
This opportunity is peanuts though, compared to the reversal potential.
Once price goes down to the range of the 1.272 to 1.618 Fibonacci extensions,
it forms a shark-looking formation. It’s like the shark is getting ready to take
a bite out of any short traders at this new low level as price reverses from
these extension levels and rallies significantly to the upside. Go long on a
trade above the previous bar high.
Initial stop below the Support FibZone.
The first objective on this trade is the .50 to .618 retracement of swing B:C.
The next objective is the 1.272 extension of B:C. Once this price level is hit,
begin trailing a stop to the previous bar low on the rest of the position.
158 Chapter 9

SMH D-D
rie Wed 9-Oct-2002_ 17,400 18,440 17,390 17,670 -0.000
20ctO2
21.430
‘
‘25.000

.
.
.
2 }24.000
.
*
*
*
.
*
.
*2 23.000
*
*
*
*
«
‘é 2.000n
>
°
*
.
*
*

. 21,000
*
.

20.000

19.206 Ret 0,766

19,000

*
8.000
17.630 Ret 1.272 |

17.000
16.651 Ret 1.618
aa
18.600
Maes
17,320
. MSenc2 Soctoe
Sep 13 20 27 Oct Ll
Chart created
Qynamic
hy Trarer (6) 1998-201

Shark Attack Long Setup:

1. Low point A is made.
2. Once a low point A is established, price rallies to form a high point B.
3. Price goes below 19.20, which is the .786 retracement. This presents a short
momentum trade opportunity down to the 1.272 to 1.618 extension of swing
A:B. In two bars, SMH hits 17.83 for a quick potential profit of a little over 1
point.
Once price hits the 1.272 to 1.618 extension of swing A:B, we have a Shark Attack
pattern in full swing. With a new low established, the shorts are in control, or they
think that’s the case, until the shark takes a bite out of them.
 Shark Attack 159
SMH D-D
Lb 21-Nov-2002 £2,200. 28.
750 27,200 2,200 2.000

ae
= 2oct et
i az:

fame 23.000

|Lite
|
| Lo
Ll
| i eocse
roc
— 22 549 Ret 1.272
24,000

23.000
bess

21,000

20.000
19.375 Ret 0,500

hs 000
|

——— 17.830 Ret 1.272 piece

_—— |
ae nn 8 Rat 2.618 Pee

[16.000

Shark Attack Long Result

:
4.A long trade is initiated at
18.45 when we get the firs
the previous day’s high aft t Price bar to go above
er hitting our Fibonacci ext
ension levels,
5. The initial stop loss ord
er is placed just below
around 16.80. the 1.618 extension level

- The first objective on

half of the position is be
retracement of the high poi tween the .50 and 618
nt B to low point C.
- The next objective is for
price to hit the 1.272 extens
level comes in at 22.54, As ion of swing B:C. This
the stock makes new highs,
the previous bar’s low. In I move the stop up to
this case, we are stopped
out at 22.35,
160 Chapter 9

/ :
ES02Z 30-1
12 Tue 14:30 971,75 873.25 868,00 869.75 _-22.00. a : :
280¢10:00

\ (2) =
\ “te B 1910.00

\ /\\
\ / i

(900.00

882.91 Ret 0,786

/ }80,00

a. /
1870.09

066,77 Ret 1.272

basi
A = 875.75
B = 908.75
— 855.36 Ret 1.616
Cc = 866.00
-—_——— a7a75 ach.oo |
——
2100 0 _230c11:00
2s
Chact created by Dmamic Trader (c) 1996-2003

Shark Attack Long Setup:

1. A downtrend is in place as the stock forms swing point A.
2. Once a low point A is established, price rallies to form a high point B.

3. Price goes below 882.75, which is the .786 retracement of A:B. This presents a
short momentum trade opportunity. In two 30-minute bars, the S&P 500
e-Mini futures contract trades down 16 points without looking back. Once
price hits the 1.272 to 1.618 extension of swing A:B, we have a Shark Attack
pattern in full swing. With a new low established the shorts are in control, or
they think that’s the case until the shark takes a bite out of them.
 Shark Attack
ES027 30-1 161
Bt-Nov-02 Mon 14
:00 22
280c10-00 2.50 922.50 218,75 920. 2150 ae
hs 7
/
See a
© Sn 920-38 Ret 1.272 loo
© Stoppaed n.ca
out @ 920
|

A = 875.75]
B = 908.75),
C = 866.00//

lea0.00
“887.3
6 Ret ose |

joo

~~ 888.77 Ret 1.272

|

ider Placing the St

xtension area befo op just below the
be 865.75, re triggering long low
. In this case, th
at would
6. The first obje
ctive on half of
retracement of the the position is be
high point B to lo tween the .50 an
w point C. d .618
7. The next obje
ctive is for Price
level comes in at to hit the 1,272 ex
920.25. As the stoc tension of swing
the previous bar's k makes new high B:C. This
low. In this case, s I move the Stop
we are stopped ou up to
t at 920.00.
162 Chapter 9

EBAY 15-I

24-Oct-02 Thu 11:00 64.200 64.450 64.010 64.160 0.540 _

2400345 240 LLOO
/
€A 000 64,450
=
64,600

A = 64.00
B - 63.30 Cc
7] c — —— §4.433 Ret 1.618 lea 400

C = 64.45 | i \
. ‘
64.190 Ret 1.272 164.200

(3) } Hé4.000

63.950 Ret 0,736

163.990

(1) my
© \ 162.600

53.400

B \ 63.200
\

5 @
/ 62300 ; Jos
‘ 290015;30 _\

ChartDynamic
created by Trader (c) 1996-2001

Shark Attack Short Setup:

1. An up trend is in place as the stock forms swing point A.
2. Once a high point A is established, price declines to form a low point B.
3. Price goes above 63.85, which is the .786 retracement of A:B. This presents a
long momentum trade opportunity. In two 15-minute bars, EBAY trades up
almost .30 points without looking back. Once price hits the 1.272 to 1.618 ex-
tension of swing A:B, we have a Shark Attack pattern in full swing. With a
new high established, the longs think they are in control. Unfortunately they
are buying in shark-infested waters.
 Shark Attack 163

EBAY 15-1
we 23-Oct-02 Thy 16:09_62,090 62.209 £3,950 62.030
240s: 45 240¢11:00
-1.Se
000
“ (6)
Cy _ 24 i
—— 64.433 Ret 1.618 |

—— —— 64,Ret
150 1272

——— =
63,075 Ret 0.500

—s 03.739 Ret O.618

———. 62.987
Ret 1.272 }63.000

—_—$——
2
Chart sreated by Snamic Trader (c) 1956-2003

Shark Attack Short Result:

4. A short trade is initiated at 64.01 when we get
the first price bar to go below
the previous bar’s low, after hitting our Fibonacci
extension levels.
5. The initial stop loss order is placed just
above the 1.618 extension level
around 64.50,
6. The first objective on half of the position is
between the .50 and .618
retracement of the high point B to low point C.
In a situation like this when
using intraday charts, I will sometimes not take
profits and just wait for the
1.272 extension level.
7. The 1.272 extension of swing B:C comes in at
62.98. Once price hits this level
I start trailing my stop to the previous bar’s high.
As the stock makes new
lows, I move the stop down to the previous bar’s
high. In this case we are
not stopped out at the end of the day, so I close
the position because the
trade was based on a 15-minute chart. So, the
short was covered around
62.50 for approximately a 2-point profit intraday.
164 Chapter 9

STRATEGY Q&A
Question: This looks a lot like a double top/double bottom strategy. Is that what you are de-
fining?
Answer: In theory, yes, the double tops and bottoms can make slightly higher highs
or slightly lower lows. I suppose you could look at this as a specific type of double
top or bottom with a specific Fibonacci target completion point for the second
peak/trough between the 1.272 and 1.618 extension levels.

Question: Again, could you explain exactly why you call it “shark attack”?
Answer: Sure. Let’s talk in terms of a Shark Attack short setup. When you look at
this pattern as it is forming, price establishes the first high point. Then it reverses in
the opposite direction to the downside. This gives “hope” to the early reversal trad-
ers looking for a nice downside move. However, when price returns to the previous
high and makes a slightly higher high, then the early reversal traders typically get
stopped out and are forced to buy to cover their short position. Not only do early
reversal traders get stopped out, but this pulls new trend followers into the game as
a new high is established. This influx of long order flow creates momentum and will
typically push price to a Fibonacci extension level between 1.272 to 1.618 of swing
A:B as we defined earlier in this chapter. Many times this is the “last gasp” exhaus-
tion move before the real change of direction occurs. When you look at a chart this
price movement takes the shape of a shark head with its mouth open. Basically, the
shark is “attacking.”

Question: As a Shark Attack pattern completes, are there any specific characteristics about
the FibZone that one should look for?
Answer: | like to see multiple extension levels fall into this FibZone from various
low to high or high to low swings. Specifically, multiple levels of the 1.272 and 1.618
ratios. When four or more extension levels come together, there is an extremely high
probability for at least a short-term tradable reversal.
——

CHAPTER 1 0

AIR POCKETS

165
 ee
STRATEGY #7
: AIR POCKE
One of my favo
TS
rite techn ical
In short, it is analysis tools
a too] that h js the Average
frend. By combin el ps determine the Directional In
dex (ADX),
ing this too] s trength or lack
4 couple of Stra with Support of Strength in
tegies that take and Resistance a chart’s
of Air Pocket é FibZones, | have
s we will di of gaps between created
We will disc scuss are Re
versa] FibZon
uss are Air P,
lines of mome
along the
Reversal Air Violation of Violation of
Pockets, a Su a Resis-
- Let’s first
look at the

Example #1
Support FibZ
one
Failure

Example #2
Resistance
FibZone
Failure
 168 Chapter 10

(2) | Resistance Fipzone #2. (6)

Resistance i -———_——
| i Momentum |
ae (3) Air Pocket i 0 blei
ailure | i | * pportuni
5
|

© [ estancerzone#3]

Rules For Buys (Shorts Are Reversed):

1, Price has been trending down and has just establishe
d a low point where the
14-period ADxX is greater than 20. This is where we
calculate Fibonacci price
resistance levels using retracements, extensions, projec
tions, and expansions.
After calculating Fibonacci price resistance levels
, two Resistance FibZones
are identified. FibZone #1 is closest to current price.
There must be a tradable gap “Air Pocket” between
the two zones, where no
Fibonacci price resistance levels exist.
4. Price trades up to FibZone #1 and pushes through
the highest level in this
zone as the 14-period ADX reading goes below
20. At this point there are
two possible entry options. First, the trader could
enter immediately upon vi-
olation of the zone. Second, the trader could wait
for a small pullback to test
the zone that was just broken, then look to be a buyer
.
5. Initial stop loss orders could be placed below FibZo
ne #1, the current bar (the
bar that violates FibZone #1), or previous bar low.
6. Objective on this trade is up to Resistance FibZone
#2.
 Air Pockets 169

E22 27 390 26 750 27-3

50 SEHD 2.090

(2)
FIBZONE
SS
a2
_ ——— — #1993 RP EPS fan
ona
|
—_— — ee

(6) 27 00n

fe6.o00

—————
|
F2S.000
490 90 1.00 |
4.144 Ret 0,786 leecos
= 23.370 Apt 1618
= 2289)Ret 9.518 ' oD
x
[* y

8
iFLoOO

f20.000

Reversal Air Pockets:

Long
1. Price establishes a Sw
ing low point where
this point we calculat the 14-period ADX is
e Fibonacci Price resi above 20. At
stance levels.
2. Two Resistance Fi
bZones are identifie
d,
3. There are over 5 Poin
ts of “Air Pocket” be
which should Provid tween FibZone #1 an
e plenty of Opportun d FibZone #2
ity if FibZone #1 is
violated to the
4. As price trades up,
the ADX drops belo
Pushes through and w 20. Price moves up
a Possible long entry to the zone and
next day GENZ 8aps is made just above 24.
up, but comes back 69. (Note: the
cleared. This is anothe to test the FibZone
r entry opportunity.) it has just
5. A stop is Placed
at the lower of a) the
Prior to the day pri bottom of FibZone #1
ce trades above the or b) the low
about the same so my FibZone. In this case
stop is just below 22. the two are
87.
6. The objective on
the trade is 27.59, whic
h is the bottom of Fi
bZone #2.
170 Chapter 10

ENZN D-D

’ ain 27-Ace-2001 51.490 99.200 Si. 150 57.700

} a

fh ———— i.
ae

(
ee (F=
FG e
fc
| | lh | Z
en “
(1) ae
ay #2 ib 4-3 _— 7

Reversal Air Pockets: Long

1. Price establishes a swing low point where the 14-period ADX is above 20. At
this point we calculate Fibonacci price resistance levels.
Two Resistance FibZones are identified.

There is over 3.5 points of “Air Pocket” or profit potential, between FibZone
#1 and FibZone #2, which should provide plenty of opportunity if FibZone #1
is violated to the upside.
As price trades up, the ADX drops below 20. Price moves up to the zone and
pushes through and a possible long entry is made just above 54.52. (Note: a
pullback opportunity never occurred as ENZN hits the Air Pocket and our
objective of 58.00 all in the same day.)
A stop is placed below the previous day’s low. This is a wide stop and |
would consider moving the stop up to the current day’s low.
- The objective on the trade is 58.00, which is the bottom of FibZone #2.
 Air Pockets
171

moo
=}. 3247 Kee 2.416
= F = 32.280
4p 1 Ox
— 31.908 Ast
|
0.300 hx2.000
nee
(5) nae

Reversal Air Pock

ets: Long
1. Price establishes a
swing low point wh
this point we calcul ere the 14-period
ate Fibonacci Price ADX is above 20.
resistance levels, At
Two Resistance
FibZones are id
entified,
There is an Air Po
cket of approximat
FibZone #1 and Fi ely 1 point of Pr
bZone #2. ofit potential betw
een
As price trades up,
the ADX drops be
Pushes through an low 20, Price move
d a Possible long s up to the zone
entry is made just and
A stop is placed be ab ove 32.34,
low FibZone #1 ar
ound 31,50,
Once again, Price
jumps through the
through FibZone Air Pocket the same
#1. I find many day that it pushes
when there are on of the powerful Ai
e or more high po r Pocket moves occu
FibZone #1 Prior ints that have test r
to the actual bar ed the upper level of
high points make in which the FibZ
the top of our FibZ one is violated. Th
lated, explosive Op one even more cri ese
portunity. tical and when vio
-
172 Chapter 10

(1)
(5)

(2) | Support Fibzone #1\

T (4)
\ Momentum
ne (3) Air Pocket ‘
ibZone Trade
Failure | (6) i |_ Sepomunny’ |

(2) | Support Fibzone #2 _

Rules For Shorts (Buys Are Reversed):
1. Price has established a high point where the 14-period ADX is greater than
20. This is where we calculate Fibonacci price support levels using
retracements, extensions, projections, and expansions.

2. After calculating Fibonacci price support levels, two Support FibZones are
identified.
3. There must be a tradable gap “Air Pocket” between the two zones where no
Fibonacci price support levels exist.
4. Price trades down to FibZone #1 as the 14-period ADX crosses below 20. At
this point there are two possible entry options. First, the trader could enter
immediately upon violation of the zone. Second, the trader could wait for a
small pullback to test the zone that was just broken, then look to short.

5. Consider three stop placement areas based on the current day being the day
price violates FibZone #1: a) current bar high; b) previous bar high; c) highest
price level in FibZone #1.
6. Objective on this trade is down to Support FibZone #2.
 Air Pockets 173

FIBZONE #1
ae be io

fsasco.
nn 8 16 Mt Oa

AIR Pocker (3)

——~ 53.975 met 0 Sop 4.000
——~ $3. TR Pat 0 xa
|

1. Price establishes a sw
ing high point where
this point we calculat the 14-period ADX is
e Fibonacci price supp above 20. At
ort levels,
Two Support FibZon
es are identified.
There is an Air Pock
et of approximately
FibZone #1 and FibZon 70 cents of Profit pote
e #2. ntial between
As price trades down
, the ADX drops
FibZone and Pushes below 20, Price move
through and a Possib s down to the
54.61. le short entry is ma
de just below
A stop is placed abov
e the previous bar hi
gh around 55.75,

through FibZone #1.

| find many of the
when there are one powerful Air Pocket
or more low points moves occur
FibZone #1 Prior to that have tested the
the actual bar in wh lo wer levels of
low points make the ich the FibZone is
bottom of our FibZon vi ol ated. These
e even more critical
and when vio-
 174 Chapter 10

[Ho cor
12 fee
Th 10-20 21.200. 21.220 20.630 20.670 0s

FIBZONE #1 21.000

AIR POCKET

r 2.020 Apo 1.00

| | FIBZONE #2? :1.614
ae 20.600
iH —
20 515 het 0.705
x 3.272
20.400

(6) naeo

Reversal Air Pockets: Short

1. Price establishes a swing high point on this 60-minute chart of HD where the
14-period ADX is above 20. At this point, we calculate Fibonacci price sup-
port levels.
2. Two Support FibZones are identified.
i 3. There is an Air Pocket of approximately 40 cents of profit potential between
FibZone #1 and FibZone #2.
4. As price trades down, the ADX drops below 20. Price moves down to the
FibZone and pushes through and a possible short entry is made just below
| 21.06.
5. A stop is placed above the previous bar high around 21.40.
6. Price hits the objective in the same bar that it pushes through FibZone #1.
All that for $.40? Yes, in fact, let’s look at it in percentage terms. That’s a 2% return
in 60 minutes.
 it gH «7 C
=
= 78.93 App
3 oor £79500
FIQZONE #t ——— natehe an be
|
| 77,000

[7600
gai a!

ee
faa
—_
ae

re Wo
EH
[72 00

Reversal Air Po
ckets: Short
1. Price establishes
a swing high point
the 14-period ADX on this 60-minute
is above 20. At thi chart of BZH, wher
support levels, s Point we calcul e
ate Fibonacci pric
e
2. Two Support Fi
bZones are identifi
ed.
3. There is an Air
Pocket of approxim
tween FibZone #1 ately 2.60 Points
and FibZone #2. of profit potential,
be-
4. As price trades
down, the ADX dr
FibZone and Pushes ops below 20, Pric
through and a Poss e moves down to
78.06. ible short entry is the
made just below
5. A stop is placed
above the Previous
bar high around 79
6. Three hours lat .50.
er, price hits the ob
jective around 75.4
5,
 a
176 Chapter 10

CONTINUATION AIR POCKETS (CAPS)

Air Pockets exist regardless of trend, but the most profitable and consistent
Air
Pockets I’ve found are either in the Reversal Air Pocket (RAPS) strategy or in this
Continuation Air Pocket (CAPS) strategy. The difference between the two is quite
simple. In the case of a short trade CAPS setup, I want to see price in a downtrend
as it comes into the first Support FibZone. For long trades, I want to see price
al-
ready in an uptrend as it hits our first Resistance FibZone. I will also specify the
ADX requirements for each setup as we dig in. For the most part, it’s a matter
of
where price was coming from prior to hitting the FibZones that determines whether
it’s a reversal or continuation Air Pocket.
 Air Pockets

/PRICE IN DOWN TREND

Example #1 be Trade
Resistance FibZone Opportunity
Failure

Example #2
Resist
esistance FibZ
FibZone Air Pocket Momentum Trade
Failure f Opportunity

PRICE IN UPTREND |
178 Chapter 10

nee | (4) Momentum

one | a) Air Pocket Trade
Failure Opportunity

Rules For Buys (Shorts Are Reversed):

1. Price has been trending up and has just established a high point where the
14-period ADX is greater than 20. With the Reversal Air Pockets, this would
be where we calculate Fibonacci price support levels. Not here. In this situa-
tion we wait for price to trade down and make a low point and start to rally
again. Now we calculate Fibonacci price resistance levels from point (2).
After calculating Fibonacci price resistance levels, two Resistance FibZones
are identified. FibZone #1 is closest to current price.
. There must be a tradable gap “Air Pocket” between the two zones, where no
Fibonacci price resistance levels exist.
. Price pushes through the highest level in FibZone #1 as the ADX has
dropped below 20. A long trade can be placed just above FibZone #1 or wait
for price to come back and test FibZone #1.
. Initial stop loss orders could be placed below FibZone #1, the current bar (the
bar that violates FibZone #1), or previous the bar low.
Objective on this trade is up to Resistance FibZone #2.
 Air Pockets 179

oa DO
Tid dO? 41.890, 45.9)
4h 790 95719, 3.1 0 see

=— 49-45) Bal 1.998 i

a — 4730 pp LOK]
FIZONE #0 (6)
——$—<$ a Ret 1.272 [OO
— 45,623

AR POCKET (3)

93,008 Net 0.496 143 ono

42,298 Nat 099 | > nn

24-590
fet BSE
PiLo0D

40.000
|
{ |; 199,000

| | 38.000

| 37.000

ti i '
}—_@ i
ADK 14,20

VacuakV
ase Pere aaea © re RPOSCERCASHIVL CREASE SES RRA Ee
Shert created
by Dengue Tracer (0) 1936-200

Continuation Air Pockets (CAPS): Long

1. Price establishes a swing high point where the 14-period ADX is above 20.
This just means there is at least a moderately strong trend in place.
2. Instead of calculating Fibonacci price support levels, wait for a swing low to
be completed. Now, let’s calculate Fibonacci price resistance levels using
retracements, extensions, projections, and expansions.
3. There are over 2.7 points of “Air Pocket” between FibZone #1 and FibZone
#2, which should provide plenty of opportunity if FibZone #1 is violated to
the upside.
4. As price trades back up, the ADX drops below 20. Price moves up to the
Se

zone and pushes through and a possible long entry is made just above 43.10.
5. A stop is placed around $40, which is the previous bar’s low.
6. Our objective is hit the same day we are filled for a 2.7 point gain.
180 Chapter 10

PARA D-D
ML S065 214 ,
(6)
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Continuation Air Pockets (CAPS): Long

ADX is above 20.
1. Price establishes a swing high point where the 14-period
in place.
This just means there is at least a moderately strong trend
for a swing low to
Instead of calculating Fibonacci price support levels, wait
ance levels using
be completed. Now, let’s calculate Fibonacci price resist
retracements, extensions, projections, and expansions.
ne #1 and FibZone
There are over 1.5 points of “Air Pocket” between FibZo
#1 is violated to
#2, which should provide plenty of opportunity if FibZone
the upside.
s through and a
ADX drops below 20. Price moves up to the zone and pushe
possible long entry is made just above 19.10.
A stop is placed just under FibZone #1 around 17.85.
days of consol-
The first day was a large thrust above the zone, then a couple
like to see much
idation and a final thrust to hit our objective. I really don’t
at most, before I
time go by where price goes sideways, two or three bars
start to consider cashing in and moving on.
 Air Pockets 181

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Continuation Air Pockets (CAPS): Long

i. Price establishes a swing high point where
the 14-period ADX is above 20.
This j ust means there is at least a moderately stron
g trend in place.
Instead of calculating Fibonacci price support
levels, wait for a swing low to
be completed. Now, let’s calculate Fibonacci
price resistance levels using
retracements, extensions, projections, and expansions
.
There are over $.60 of “Air Pocket” between FibZone
FibZone #2, #1 and
which should provide opportunity if FibZone
#1 is violated to the upside.
As price trades back up, the ADX dro ps belo
w 20. Price moves up to the
zone and pushes through and a possible long
entry is made just above 29.18,
A stop is placed just below $28.00, which is the
previous bar’s low.
Although the size of the profit potential is
not fan tastic, it is a setup that
seems to hit with a very high accuracy rate.
182 Chapter 10

~~_|Ve Trend Is Down |

(5) ~~~»

3 Momentum
Support Trade
FibZone Opportunity
Failure

Rules For Shorts (Buys Are Reversed):

1. Price has been trending down and has just established a low point where the
14-period ADX is greater than 20. With the Reversal Air Pockets, this would
be where we calculate Fibonacci price resistance levels. Not here. In this situ-
ation we wait for price to trade up and make a high point and start to decline
again. As we start to decline again, it is time to calculate Fibonacci price sup-
port levels from point (2).
2. After calculating Fibonacci price support levels, two Support FibZones are
identified. FibZone #1 is closest to current price.
3. There must be a tradable gap “Air Pocket” between the two zones where no
Fibonacci price support levels exist.
4. Price pushes through the lowest level in FibZone #1 as the ADX has dropped
below 20. A short trade can be placed just below FibZone #1 or wait for price
to come back and test FibZone #1.
5. Initial stop loss orders could be placed above FibZone #1, the current bar
high (the bar that violates FibZone #1), or the prior the bar high.
. Objective on this trade is down to Support FibZone #2.
 Air Pockets 183

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Continuation Air Pockets (CAPS): Short

1. Price establishes a swing low point where the 14-pe
riod ADX is above 20.
This just means there is at least a moderately strong
trend in place.
2. Instead of calculating Fibonacci price resistance
levels, wait for a swing high
to be completed. Now, let’s calculate Fibonacci
price support levels using
retracements, extensions, projections, and expansions
.
There are over 2.7 points of “Air Pocket” between
FibZone #1 and FibZone
#2, which should provide a very nice opportunity if
FibZone #1 is violated to
the downside,
As price trades back down from point (2), the ADX
drops below 20. Price
moves down and through FibZone #1 and a possi
ble short entry is made just
below 70.73.
A stop is placed just above $74, which is the previous
bar’s high.
These are the nice juicy setups. The same day this
short is triggered, we have
closed out the position for a possible 2.7 point gain.
184 Chapter 10

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205-2004.

Continuation Air Pockets (CAPS): Short

1. Price establishes a swing low point where the 14-period ADX is above 20.
This just means there is at least a moderately strong trend in place.
Instead of calculating Fibonacci price resistance levels, wait for a swing high
to be completed. Now, let's calculate Fibonacci price support levels using
retracements, extensions, projections, and expansions.

There are over 1.7 points of “Air Pocket” between FibZone #1 and FibZone
#2, which should provide a short opportunity if FibZone #1 is violated to the
downside.
As price trades back down from point (2), the ADX drops below 20. Price
moves down and through FibZone #1 and a possible short entry is made just
below 46.35.
A stop is placed around $49, which is the previous bar's high.
This strategy is more powerful when there has been a previous test of
FibZone #1, as seen above. By testing the zone prior to violating, it gives
more reason for sell off upon violation. Same day profit of 1.7 points.
 Sc

Air Pockets 185

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Continuation Air Pockets (CAPS): Short

1. Price establishes a swing low point where the 14-period ADX is above 20.
This just means there is at least a moderately strong trend in place.
Instead of calculating Fibonacci price resistance levels, wait for a swing high
to be completed. Now, let’s calculate Fibonacci price support levels using
retracements, extensions, projections, and expansions.
There are over 1.4 points of “Air Pocket” between FibZone #1 and FibZone
#2, which should provide a short opportunity if FibZone #1 is violated to the
downside.
As price trades back down from point (2), the ADX drops below 20. Price
moves down and through FibZone #1 and a possible short entry is made just
below 52.28.
A stop is placed just above $54, which is the previous bar’s high.
Two days later the potential to take 1.7 points of profits off the table is avail-
able.
 a __

186 Chapter 10

STRATEGY Q&A
Question: Why use the ADX with these Air Pockets?
the ADX. I have
Answer: First of all, its good to understand the different readings of
learned to look at the ADX this way:
0-15 Non-trending market
16-20 New trend gaining strength
21-40 Trend strength in full swing
>40 Extreme levels of strength likely to reverse down soon
with a reading
So, I chose to use 20 as my focus ADX number. An Air Pocket mixed
might be in the
that has crossed from above 20 to below 20 signifies a reversal that
this under-
works. At the least, the chart will be in non-trending mode. So, with
creates nice Re-
standing of the ADX and price violating a FibZone at the same time
is probably
versal Air Pockets (RAPS). Now, to completely focus on reversal trading
continua-
a loser’s game. You need an arsenal of tools that will help you find trend
As an ADX es-
tion trades. The Continuation Air Pockets (CAPS) are perfect for this.
creating a little
tablishes itself above the 20 level then falls slightly below it, it is
for a while
“trap,” in my opinion. See, the trend may be taking its time and resting
in place and a
along the way. That puts traders to sleep. So, when you have a trend
s its trend, it
little ADX trap (above/below 20 shake out) then price action resume
filter for Air
can create powerful trading opportunities. Bottom line: ADX is a great
Pocket setups.

Question: Do any price levels have to be deleted to create an Air Pocket?

Answer: Yes. If you remember a FibZone is
coming together in a relatively tight range.
fined and between those two FibZones sits
will delete that price level and a clear Air
price levels are floating between FibZones
need three. Three is the magic number for a
only valid if there are three price levels
So, if there are two FibZones nicely de-
one Fibonacci price level all by itself, |
Pocket will be identified. Even if two
I will delete them. Why? Because we
FibZone.

Question: What time frame(s) work best with this strategy?

weekly chart.
Answer: The lowest I will go is a 60-minute chart and the highest is a
re between 1
My sweet spot is the daily time frame. It creates Air Pockets anywhe
Pocket op-
and 10 points, while anything below 60 typically creates pennies of Air
portunity.
 ee
Air Pockets 187

Question: You mention that there are three

places to consider placing stops; (in the
long setup) below the current bar low (the case of a
bar triggered into the long trade), below
ous bar low, or below FibZ one #1. How do I know which one to the previ-
use?
Answer: Stop placement involves thin
king through a couple of things. First
ing how much of the Air Pocket prof , identify-
it potential is between FibZone #1
#2. Second, knowing how muc and FibZone
h you can risk in a trade. So,
Air Pocket only presents the potentia in a situ atio n whe re the
l for 1 point of profit, by placing
low the previous bar low I will expo my stop be-
se myself to 3 points of risk, Consiste
myself in trades like this is a loser’s ntly putting
game. So, the placement of the stop
changed and brought in tighter to perh must be
aps the current day’s low. The othe
deal with this situation is to adjust the r way to
number of shares you are trading to
for the higher point risk in the trade. account
Knowing how many shares to trade
tion of knowing how much capital is a func-
in your trading account can be at
trade. That “per trade risk amount” risk on each
is then divided by the number of poin
in the trade you are considering. The ts of risk
result is the number of shares to trad
the trade setup you are looking at. e with in

Question: Do you ever continue to hold

these positions beyond the objective of FibZ
one #2?
Answer: Depending upon position size,
I have at times taken half of my posi
at FibZone #2 and moved my stop tion off
to breakeven on the rest. This definite
you in the game in the situation that ly keeps
price continues to move in your dire
also think this kind of money manage ction. |
ment works best when trading CAPS,
you are trading WITH the current tren because
d.