This ETF peaked on February 16th and has since seen a steady move lower the past 3 months. This downwards move produced a bearish ABCD pattern with a smaller abcd pattern inside of it. This double dose of patterns is called a butterfly and typically extends out to its 127 and/or 161 fib extensions. The May 13th low dropped just in between the two and has rallied over 10% since. However, I believe this rally is setting up a potential short trade.
Why? The dominant ABCD pattern had a neutral retracement (less than 50%), which indicates a strong bearish trend. The skewing on this pattern was to the left (7 bars up to 38 bars down). This indicates a downwards move that lacked momentum. So it’s no surprise that we would get a move back inside the breakout level. However, I still believe the 100% projection target of the ABCD pattern is still in play. That would mean a move down to 77.35 before it rises above 130.80 is still possible. Therefore, I would still look to make bearish trades.
But where? That’s where we look to volume profile for answers. If we look at all the volume from the Feb 16th peak to the May 13th low, we will find a large volume cluster zone between 120.34 and 126.25. This clusters point of control (POC) is roughly 122.14. The POC is the price level with the heaviest volume. This resistance zone alone is enough to be bearish, but there’s more. There’s a tight cluster of 3 separate Fib retracements and/or projections inside this volume cluster between 121.09 and 123.61. Price action often finds resistance in these situations.
What’s the trade? Look to buy puts when price trades between 120.34 and 126.25. You could build a small position towards the bottom of this zone and increase the size towards the POC. Or you can just wait to see if price moves to the POC at 122.14 or the middle of this zone at 123.30 and build your position there. This set-up is no longer valid when price breaks above 130.80. Initial downside targets would be the recent low at 97.22 and the 100% Fib projection of the ABCD pattern at 77.35. Look for further posts for other targets that will be available if this pattern develops. Stay tuned!