The pattern you will learn in this lesson revisits a method that you already know from previous lessons. The basis of this pattern is the moving average channel (MAC). I will assume that you have learned the basic signals. You may want to review the MAC lessons if you have forgotten some of the rules.
Humor me for a few minutes while I test your recollection of history. Do you remember the Cuban Missile Crisis? If so, you will recall that this was a time of considerable turmoil in relations between the Soviet Union, the United States, and Cuba. In fact, some historians now believe that we were closer to the brink of nuclear war than we have ever been.
The crisis occurred in 1962 between October 18 and 29. It was a result of a naval blockade imposed by then-President Kennedy to embargo all ships seeking to enter Cuban waters. The blockade was ordered in response to the shocking surveillance evidence that Cuba, with Soviet assistance, had installed nuclear-armed missiles, which were pointed at the United States. Panic reigned supreme throughout the United States as the showdown unfolded.
Many Americans retreated to their nuclear fallout shelters. Many others began building shelters, believing that war was imminent. The financial markets were also unhappy.
While many investors panicked, savvy investors and traders were heavy buyers. They did so because they had evaluated the worst-case scenario. There were only several possibilities. First, the situation could stagnate and the stalemate could continue. This was unlikely due to the severity of the confrontation. Second, there could be a nuclear war. In this event, the United States would suffer severe causalities and damage. Depending on how serious the conflict would become, there might even be a complete cessation of stock trading.
Finally, the third alternative was that the situation would be resolved peacefully, in which case stocks would soar. Prescient investors bought stocks because they felt that in the event of a nuclear war we would all be wiped out. There was every reason to buy stocks because the alternative was complete destruction. Those who bought on the bad news fared extremely well. From the late October low, stocks began a three-year bull market.
Setup and trigger
The CMC pattern occurs after a market has triggered a MAC buy or sell signal. As you will recall, two consecutive price bars above the moving average (MA) of the high trigger a buy while two consecutive price bars below the MA of the low trigger a sell. Once there has been a trigger in a given direction, we consider the trend of the market to be consistent with the direction of the trigger.
What if a setup occurs that is opposite from the current trend In other words, the market is in an uptrend and then you see one bar below the bottom of the channel? What’s the worst-case scenario if you went long (that’s right, long) at the end of that bar The worst case would be one more consecutive bar below the channel that would trigger a sell, in which case you would exit the long and reverse to short.