Page 362 - THE MARKET WHISPERER

358 PART 10 - Winning Trades

opportunity forms when the strong gap-closing momentum breaks after
the close [3] and causes the stock to continue trending down [4]. Note how
the distance between points 3 and 4 is identical to that of between points
2 and 3.This is the basis for the term reciprocal range.

Analyzing the process: At the start of trading, the stock opens with a
gap up [2]. Within minutes, bears take control and the stock begins closing
the gap. Long players, who had hoped that the stock would continue rising
(Gap &Go) find themselves trapped on the wrong side of the game and
set their exit point (stop order) at the most reasonable point: this is the
gap-closing area [3]. Short sellers who sold at [2] are aware that stocks
have a good chance of changing direction after closing the gap [3], and they
therefore set [3] as their profit target. When the stock closes its gap [3], we
can expect a reversal of direction, or at the very least a slight retracement
upwards. Indeed, a little below [3] we find the upward retracement [5].
The entry trigger into reciprocal range trading is where the bear flag at [5]
breaks just below the midway point.

What happens when the bear flag breaks? Everyone has a common
interest in selling: new short players will enter shorts when the bear flag
breaks, short players who entered at [2] will be sorry they closed their
shorts and some will execute new shorts, buyers who entered at [2] when
trading opened understand that the closing gap will not save them and
they sell. Other aggressive buyers who bought when the gap closed [3],
assuming that the stock would begin to rise once the gap had closed, find
themselves on the wrong side of the action and are also forced to sell.

Who are the losers? Buyers are, of course, are the biggest losers; not
only the aggressive ones entering when the gap closed [3] in the hope that
the stock would reverse and begin an uptrend, but also those who bought
during the previous day and now find themselves trapped in a crashing
stock. The coming together of energies created during the down movement,
together with the closing of new and old longs and the entrance of new
short sellers, leads the stock to a further sharp drop which, in most cases,
can be expected to bring it down to its double-distance target [4].

To increase the success rate of this process, it is best if the gap-closing
point [3] is in the vicinity of the previous day’s pivot point. This is true
for the case above. As we have learned, the pivot point is a mathematical
calculation of the price at which most of the previous day’s trading
volume occurred. As can be seen in the previous day’s chart, most of the
activity occurred around the point where the gap closed. The pivot point