We often see sideways corrections being somewhat skewed in the direction of the preceding trend leg. For example, in a bull trend the market suddenly turns down for a couple of bars (wave A) then forms a marginal higher high above the peak (wave B) and when many expect price to return at least to the lowest point of wave A it actually fails to travel back to the minimum of the first reversal attempt (in wave C). Therefore after the higher high (wave B) we see a higher low form which matches the definition of the uptrend and creates a running flat. Although the market corrects in a range, the trend is subtly present even in the shape of the countertrend move.
Have you ever thought about how bulls and bears are acting when a running flat forms?
“A bullish running correction with a higher low expresses the buyers confidence.”
I am not going to explain the internal subdivisions of a flat pattern, because, as a trader, I don’t deal much with that. But, for perspective, a flat correction is two attempts against a prevailing trend interrupted by a wave in the direction of the dominant trend. I like to trade the second attempt (wave C) that fails to reach the extreme of the first reversal attempt (wave A).
The Balance between Bears and Bulls
Here is the story behind the pattern applied in a bull trend.
The market reaches to a target zone or resistance at area 1. We see it when some bulls close their positions and aggressive bears open shorts, which temporarily overwhelms the new buyers and creates a visible bearish signal bar. The drop doesn’t get far before buyers feel the lower prices are a bargain, and they start to buy at area 2. Some of them jump on board for a scalp to a new high while others sit in for a longer journey. A support level emerges.
At area 3 the scalper bulls start to close at the high and here double top traders see the opportunity against the trend. Other bears see a better probability selling into a second bearish leg hoping for a change in trend (they have a better chance actually). Some bulls also get cold feet seeing the previous bear attempt (wave A) and happily take the profit at the previous high. Resistance gets confirmed.
And here comes the tricky part.
Double top or range traders would like to close their scalps at area 4 where we previously saw the support. Buyers would like to add to their longs at the same spot and that is the minimum target for the early bears also. But nope. The second leg down, namely wave C, runs out of steam and aggressive bulls buy early at area 5. These aggressors are confident and strong players. They know the situation. They understand the larger picture, they know that they have 70% chance of the continuation of the trend, and they don’t need to try to save money by trying to buy a bit lower.
That’s how the market traps the double top sellers, early bears and traps out the classic add-on buyers. This situation sets up an imbalance that persists quite long after the pattern has developed.
conclusion: sellers strength < buyers strength
A bullish running correction with a higher low expresses the buyers confidence. The opposite is also true: A bearish running correction with a lower peak signifies selling confidence.
What Comes After?
I like to be among the aggressive buyers or sellers at area 5 or join them as soon as possible because of the reliability of the following trend. Running corrections are rarely ever terminal setups which means that they don’t fall short of targets. But, don’t expect the market to form a smooth straight-ahead trend leg after these running patterns. Instead, the trend typically starts to loose momentum after a sideways correction, and it tends to grind higher with a channel type character. But, it does so very reliably.
The time zone we reference on our charts is Pacific Standard Time. Therefore, the U.S. cash market opens at 6:30 AM PST and closes at 1:00 PM PST.