stingray2 says in e-mail:::: While I have used these very successfully in commodities. The application in individual stock , I have not tested. Though It should work specially for high volume stocks.
II. The Hole-In-The-Wall
1. Active trends rarely flip over quickly. Crowds feed dying rallies
and selloffs long after the real move ends. As volatility slowly winds
down, cash finally dries up and a new primary impulse erupts in the
opposite direction. So it goes with most market cycles. But under
rare circumstances, shock events can sharply quicken this
evolutionary process so that a new trend begins in a single bar.
B. Trade Mechanics
1. Rallies terminate as the herd drives prices beyond reason.
However, when the herd decides to run, markets will collapse under
their own weight. This is the basis of the Hole-In-The-Wall.
2. After reaching a new intermediate or long term high, a sharp
downward gap ruins the bull psyche and damages it.
3. Volume on the decline must exceed the last impulse rally.
4. Opportunity measurement
a) The width of the gap
b) The amount and intensity of participation
c) The relative strength just before the event.
d) A study of the conflict on either side of the event
(1) To determine if the market retraces to the gap
(2) Or just drops
5. Not all HIT-W’s ignite downtrends. They may;
a) Ignite major downdrafts or
b) Create an intermediate sideways congestions to fill the
gap before prices move higher.
6. In the majority of cases, the first pullback towards the gap does
not fill it.
7. Every HIT-W has different characteristics that must be studied.
a) A sale immediately following the gap may end up with a
one bar move of a protracted downtrend
b) Watching the short term move following the gap gives the
best indication of action to follow
c) The best entry usually occurs on the pull back that tests
d) Another strategy is to follow the price
bars to the first
bottom and then draw a fib grid to the high and see how the
gap fits in the scheme of things. Then sell short on the
retracement when reaction occurs at the gap, fib
retracement levels or S/R levels.
8. The price shock of HIT-W’s occur in all time frames.
a) The HIT-W’s usually occur at the opening bell. Thus they
print on 1 min and 5 min charts first.
b) Take advantage of them in the first hour.
(1) First hour short sales may be difficult to execute when the
market is volatile.
(2) Be very keen on the first pullback to fill the gap
(3) A tried and true test of experience says that markets will
rarely test the gap if they do not complete it in the first hour
c) Because HIT-W’s may fill during the course of the day,
they may not appear on all daily charts.
9. The best setups occur after waiting for the first short term
a) Hopeful buyers will try to run the market back up after
volatility and anxious sellers dissipate.
b) Look to get short at the gap or at fib retracements on very
10. Holes that follow through lower immediately suggest weak
a) Follow the move closely with trailing stops.
b) Take profits at money management targets.
c) Stay defensive
d) Watch for mirrors and support levels
e) Short covering rally’s can be quick and merciless
11. Holes prove better signals when they violate short and long term
moving averages. Be cautious when the do not.
12. When a gap drops into the top of support, it often triggers a
sideways condition rather than an immediate sell off. Look at the
bar after the signal for input on the market’s strength or weakness.
a) Narrow price action near the bottom of the prior bar’s
range should lead to a rapid decline.
b) Watch the volume because some holes indicate tired
markets rather than major trend changes.
C. Support Hole
1. The market rallies on strong momentum framed by a channel
2. The market typically reverses from the top or center of the channel
with a hole in the wall which gaps through support.
3. The strength of the down move is both measured by volume, and
penetration through the center of the Bollinger band or midterm (15-20
day moving average)
4. If you can watch the market on the day of the intended down move it
can be sold on a lower time frame on a retracement in the first hour. The
stop should be relatively tight and if stopped out do not get discouraged.
5. The market should retrace upon the expanding down bars touching
the extremity of the Bollinger bands,
6. Strike a Fib grid and look to sell on reversal candlesticks anywhere
from the 38%-62% retracement lines.
7. Take profits on a quick money management target.
III. Cup and Handle Low
1. Marks the termination of a long term rounding bottom and the
failed first breakout
2. After a prolonged decline time is required for bulls to lick their
a) This pattern may form after a long decline (This may take
quite a bit of time to unfold)
b) Or it can be a continuation pattern after an advance,
(Usually takes less time then in the case of the long decline)
3. While they are licking their wounds Value Investors slowly
introduce new long positions to build a strong base
4. Momentum traders buy the market up for the first test of the rim
but are thwarted by bears waiting in the wings above.
a) The resultant pullback usually has little higher volume but
b) The steeper the pullback the greater the strength of the
ensuing push back up
5. The pushback is halted because of the strength of the Value
6. A reversal and subsequent movement up is confirmed by the
formation of the handle, increasing volume, and the penetration to
the upside of the rim of the saucer.
7. Targets are place at a height above the rim equal to the
distance from the rim to the base.
B. Trade Mechanics
1. Bottoming psychology controls the physics of the movement
2. This bottoming psychology prevents a drop below the bottom of
3. Multiple assaults on the rim are possible
C. Cup and Handle Trade Strategies
1. Look for the reversal after pullbacks
2. Lowest risk but most aggressive entry as at reversal
candlesticks near the 50% retracement.
3. Intermediate risk or second entry positions is at the breakout of
short term resistance line. Use covered call strategies on second
position near saucer rim.
4. Notice volume.