Part 3B: Reversing the Order Flow Bias

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In the prior installment, we described the bits and pieces of a process we called “reversing the order flow bias.” In this installment, we’ll go over the same process described in Part 3A, but with a more holistic point of view. We’ll reivew an actual trade as it was executed in real time and the main logic behind the trade analysis.
 
BUYING A STRATEGIC CORRECTION IN PCU (Southern Peru Copper)
Coming into June ‘06, the monthly chart (see Chart 1, below) shows PCU reacting in the context of a bullish PTI (primary up trend) supported by rising Quarterly Equilibrium.

By mid-June, the order flow bias is down as PCU is in a strategic correction retracing back into a strategic buy zone at A. The strategic buy zone is bounded by the light blue line (estimated Quarterly Equilibrium) around 76 and the dark blue line (actual Quarterly Equilibrium) below, near 65.

Metals and metal stocks were collapsing in daily timeframes, but the primary trend was solid; creating a variant perception between traders operating in different frames of reference.

This presented an opportunity to increase or initiate long exposure in PCU—now we need to drop down into the local price action (weekly & daily timeframes) to monitor the price action more closely to watch for the weekly order flow bias to reverse back up.

If you were short PCU, the strategic buy zone, provided an excellent target to decrease short exposure and take at least partial profits.

In Part 3A, we listed the reversal process in four steps, but cautioned that the process can be irregular, and not necessarily linear. Those four steps were:

A. Price Too (High/Low) & Price Rejection
B. Stopping Action
C. Controlling Bids or Offers Break
D. Price Separation
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