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The Traders Wheel
11/8/98  by Alan Farley


Coiled Spring

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.  

After a healthy 15-point rally, INTC’s low volume price drop flagged the eruption of a Coiled Spring breakout. Following a series of narrow price bars, the expansion day at 85 triggered a runaway 10-point continuation move. intc.gif (4251 bytes)

 

The shallow rise against the uptrend set up a weak support line defining the breaking point for TLAB’s subsequent stomach-churning drop. tlab.gif (4043 bytes)

 

Article contributed by The HARD Right Edge, which presents highly original tutorials, strategies and resources on multi-trend technical analysis and and short term trading. Article reprinted here with permission, which presents highly original tutorials, strategies and resources on multi-trend technical analysis and and short term trading. Article reprinted here with permission.
 
 

 

 
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Last modified: April 02, 2001

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