Entry Models - Part 1: V-Shape

How and where I play them...

V-Shape Recovery

Last revision December 9th, 2023…

Sometimes, price falls straight into a strong demand zone or support level after a steep decline. When price arrives at demand, there is always that first indication of short covering, resulting in a wick. The wick indicates demand.

Many trapped longs now place their stops below this wick, but price may just be bouncing, and there is really no reason to buy at the first sign of demand. We need a setup before we can buy.

When price returns to this low (the wick) and undercuts it, early longs (knife catchers) and trapped longs all have their stops triggered, and price spikes lower, undercutting the demand zone. Some call this a manipulation. I like to call this “residual selling pressure” or “artificial selling”.

This new push lower usually struggles with resistance of the bounce zone it lost, which is identified with the close of the last bearish candle and the open of the only bullish candle.

If price now sets up a reversal, it will provide an informed entry to take the long, back to resistance, and have an informed stop in case the push higher fails.

V-Shape recovery occurs when price makes the first higher high above the previous candles, now triggering stops of shorts as bulls enter the trade. That is the setup I was waiting for. I enter on that first higher high.

This phenomenon happens on all timeframes, and the initial V-Shape recovery is just a buy spike that serves to bring price back to the demand zone it lost.

Once price arrives back at that demand zone, sometimes it immediately accelerates higher (lucky day), but other times it reverses or consolidates. Therefore it is important to take partials when price arrives back at resistance.

While ‘demand’ will always look like a wick forming on the hourly timeframe, you want to see true signs of momentum on lower timeframes to confirm that the setup has potential. If the lower timeframes show a grinding bounce with overlapping candles, you could be looking at a bear flag that sets up another undercut. Never get greedy, if something isn’t right, just close the trade before it goes green to red.

A solid V-Shape setup bounces, captures the first immediate balance zone that it lost, and then respects that as it pushes higher.

Here are the details illustrated in 4 pictures with notes, nuggets, and my commentary:

First, the horizontal line marks the lost balance zone.