A. Identifying Strategic Corrections

In Part 1, we defined a primary trend and provided examples showing that almost ALL major corrections back to quarterly price levels REVERSE BACK in the direction of the primary trend. The only exceptions occur when the primary trend itself reverses and these events are infrequent.

Here in Part 2, we introduce the notions of  ideal trade location and variant perception.
 
We’ll focus on three major situational opportunities that occur in markets where the risk-reward is asymmetrical—which means the risk exposure is a fraction of the potential reward.

IDEAL TRADE LOCATION. We call these three situations “ideal trade locations” because they represent optimal price regions for making portfolio adjustments (initiating or closing out shorts and longs). But ideal trade location also varies according to: 1)  the type of market environment you are facing and; 2) the location of price relative to rising or declining quarterly
equilirium levels.

Markets exhibit a high degree of efficiency, but they are not 100% efficient. This means profits holding long or short inventory are difficult, but possible—and even highly probable, if you are selective about where you initiate changes in your long or short inventory.

VARIANT PERCEPTION. Profitable trading situations tend to coincide with a divergence in the perceptions of various kinds of traders as to what exactly is occurring in a given market. This type of divergence is called a “variant perception.” We’ll illustrate how this manifests on a chart shortly.

The first of three ideal trade locations is what we call a “strategic correction”.

STRATEGIC CORRECTIONS. When the primary trend is up, a retracement back to rising quarterly equilibrium is a strategic correction.

NOTE: retracement into strategic sell zones present a set of opportunities to increase short inventory or reduce long inventory.