Without exception, setups form around pauses in trend. An exhaustion pivot marks a local bottom or top, forming a bounce or a pullback. These are called Exhaustion and Rejection, forming the setup high and low. A sweep of either side is next and presents the first opportunity to define risk and take a trade.
Stage One – Setup Formation
The setup model initiates with exhaustion and rejection to mark a pause in an existing trend. These two base parameters define support and resistance against which we can reliably monitor for continuation attempts. The rejection candle serves as an indicator of underlying strength. A strong momentum candle warrants caution for early buyers while weaker candles indicate early signs of price discovery or contraction.
Stage Two – Continuation Attempts
After the rejection pivot has formed, both buyers and sellers have identified their key levels and each side will now attempt continuation. Sellers dominate below Point 2, the rejection pivot. The pivot numbers don’t dictate a chronological order. Point 4 may form before point 3. The numbering is for setup location reference only.
Stage Three – Ultimatum / DEM Formation
The formation of rejection point 4 marks setup maturity: price HAS to expand lower. Failing to do so means sellers lose control, neutralising the trend and initiating a state of balance.
Connecting lines between points 1, 2, 3 and 4 reveals the setup fractal (‘N’ shape). A wedge can be drawn to highlight the Diagonal Entry Model
Pivots #3 and #4 become key to the directional break – acceptance below #3 or above #4 can be confirmed via a lower timeframe wedge (DEM).
Triggers and Execution
The first bear trap now forms Swing Point 5 – the high probability reversal swing.
Failing to confirm acceptance key resistance and the setup high could indicate that price has to spend more time contracting while the EMA9 enters the setup and the downtrend gradually loses momentum (the turn).
After pivots #3 and #4 have formed, a falling or wedge contraction can form and price can make new lows. The setup remains live as long as sellers fail to expand out of each lower high rejection.
The first higher high confirms the reversal. The longer it takes, the more explosive the break.
