Price Displacement

One oddity that I am encountering more and more frequently is something I call Price Displacement (PD). This particular price action (p/a) is similar to stop running moves but is definitely different in nature. I believe this phenomenon is a by-product of algorithmic trading programs where the program “jumps the gun” or starts a run that it later deems incorrect then attempts to correct itself, or gets corrected by other algos. Basically what happens is that there appears to be a break-out move that tends to be violent in nature. Price almost immediately moves to a consolidation zone where p/a moves in a channel that can be any form of horizontal, up sloping or down sloping consolidation, or even just violently reverse right back up. There appears to be two types, one is a move away then eventually back to the “proper” price zone and the other is one PD followed by an equal and opposite PD. Time frame seems to be irrelevant as I’ve seen this occur from 1-minute charts on up.

Even though I’ve seen it numerous times I haven’t documented it with any charts but have just been observing the price action (and cursing profusely when caught in one of these shake-out moves). I’ve started a new folder in the main chart area to dedicate to Price Displacement charts that I observe and will drop any relevant charts into that folder.

The worst aspect of PD is that I have yet to come up with a good way of determining the onset of PD. So far, I have only been able to positively identify PD in hindsight. Occasionally a standard RSI (14 on close) will signify a problem via lack of divergence but it really is a hit or miss affair.

Here are a couple of charts to visually show what I’m referring to. The first is Dixie just before she bottomed around $73.88 heading down into a falling wedge. This particular example is a little milder in form in that the p/a tends to just fall away and on the flip side gradually rises back up.chart

This other chart is also of the Dixie (just was handy, I’ll post plenty of pairs with the same phenomenon) that is of the more violent nature and also happens to include an opposite PD of equal proportion. This second chart is a 15-minute standard pennant pattern except that half way through the pattern the p/a violently dropped out of the pattern then briefly consolidated before shooting in the opposite direction an equal amount of the previous PD. Once again it briefly consolidated before dropping back into the “proper” pattern which it subsequently completed then dropped to the indicated target point.
chart

These are the sort of moves that not only make this job extremely challenging but make it aggravating beyond belief.

This entry was posted in Market Thoughts. Bookmark the permalink.

Leave a Reply