Markets cycle continuously through bursts of intense
activity, followed by periods of relative calm. This natural pulse of inhalation and
exhalation allows price to step sharply toward a new level, thoroughly test its boundaries
and continue forward (or reverse) after new range resistance is established. As this test
evolves toward its final outcome, a stock may exhibit key characteristics of an impending
vertical breakout. Smart traders can identify the signature for this Coiled Spring
move and make their play well ahead of the crowd.
The Coiled Spring arises from continuation of a dynamic
trend. The relative power of the last ramping move predicts the inclination (declination)
of subsequent price thrusts. Therefore, vertical movement must characterize those price
bars. Odds further improve when two moves of the same angle have already taken place, but decrease
for three or more prior thrusts.
Visual inspection of price bars within the congestion must
demonstrate narrowing range, i.e. overall decrease in average length of the bars or
candles. The odds for an impending Coiled Spring breakout increase when the current bar is
the narrowest of the last 7 bars. And when each of the last two bars are the narrowest of
the last 7, a dynamic breakout (or breakdown) is imminent.
Volume must trend sharply downward as the congestion
progresses. Any volume spike not producing an immediate breakout, but violating the
downtrend of the short-term volume, negates the trade. General price movement should
counter the prevailing trend. The most powerful CS breaks will occur after price swings
sharply against the trend but not violate any significant support or resistance. Use NR7s
(narrowest range of the last 7 bars), volume and moving averages to pinpoint the terminus
of this counter-trend extreme.
Examining patterns within the next lower time frame will
reveal effective trade entry points. Congestion between powerful trending movement
frequently appears as a 1-2-3 wave against the trend. Cautious traders also closely review
the next time frame above the one under evaluation. Large-scale price
development may produce support and resistance not previously considered. Finally, if the
larger scale trend is opposite to the current trade, the congestion zone may not
immediately resolve into another profitable thrust.