One of the Patterns one have to watch out when there is a four day balance formation followed by a trending breakout. Breakout generally happens especially post a news event or a short covering despite strong negative sentiment, long liquidation despite strong positive sentiment.
Lets take recent example from Bank Nifty where the news sentiment is negative & extreme during the start of Jan 2017 series as RBI warns in reports about Banks bad loans hits 14 year high and RBI warns of further rise in bad loans. The report got released on 29th of Jan 2016. Also series of
Also series of mega rate cuts from the banks during the start of new year brings more downside fear to the participants.
With the given extreme negative sector sentiment, bank nifty also under-performed the benchmark index nifty 50 drastically followed by four day of consolidation as visual from the daily market profile charts. However despite all the negative news flowing out, short covering happened on 6th Jan 2016. Which is a warning sign not to trade against the trend anymore – though most of the trader loves to trade inline with the news sentiment.
— Marketcalls (@marketcalls_) January 6, 2017
The four days of balance (consolidation) is nothing but more short term players are piling up their short inventories and getting short to too short. Next day followed by short squeeze and trend acceleration represents nothing more than inventory adjustment from the short term players. And almost every weaker players gets underwater despite the news sentiment being negative. If you are frequent trader you might wintessed such situations often in the markets.
Understanding the context behind the move helps you to avoid taking a bad decision and often helps you to stay from being part of the dumb crowd.
In case if you are new to market profile it is always good to start with our market profile tutorial series