Price Action Is Not Always What It Seems

Price can be deceptive!

Especially if you allow yourself to be caught up in the lower timeframe data.

And even more so when that lower timeframe offers a large wide-range candle.

Let's look at this lower timeframe chart from Crude Oil on the 24th of February 2014.

It looks even more bearish for those who consider volume as well.

But you don't always get the right message from price action analysis.

To get a more accurate message you need to consider the wider context. This might include a higher timeframe S/R framework. It might include market internals. It might include time of day factors. It might include the presence of scheduled news events. And on and on.

Considering S/R for example, the scenario looks quite a bit different.

We'll zoom out a little here via the 3 minute trading timeframe.

A wide-range red candle has us immediately reacting to what appears to be a bearish signal.

But when we consider the market structure we find that the market may not be so bearish after all.

When you consider it… that pullback prior to the large red candle is quite extended in length. Certainly not a bearish sign.

And let's look "inside" the volume surge, via a much lower timeframe.

Looking deeper into the volume surge, we can see that it largely came in at the end of the move rather than the beginning, indicating potential stopping volume. Someone is buying at support.

I'm open to two possibilities at this stage and will adjust tactics depending upon the nature of the following price movement.

But my preference is for the bullish (reversal) scenario.

Let's look at price movement over the next few minutes. Please note: my preference in most articles is to use the trading timeframe chart whenever possible, as it's the chart which should have priority for your focus. In this case the lower timeframe chart better displays what I was seeing, so we'll use it here.

A wide-range bullish or bearish candle is important information. But don't just assume it's a sign of bullish or bearish strength.

Especially when it's a one-off occurrence on the lower timeframe.

Much more important is the action which follows this candle. Does it show a continuation of the potential bullish or bearish strength? Or does it show a failure to continue in that direction?

In this case our wide-range bearish candle was likely a result of cascading stops triggering below the grinding bullish pullback. On breaking to new lows there was no wider bearish orderflow to continue to push price further. And in fact volume (and the following price action) shows some evidence of potential buying at support.

The bearish candle was the largest of the session. But price action is not always what it seems.

Market context offers another scenario.

And a failure to continue lower confirms that alternate scenario.

Always be open to information which does not support the initial impulsive bullish or bearish impressions that come from lower timeframe wide-range candles.

Happy trading,

Lance Beggs

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