The 3-2

An outside bar is already an expansion of the range. When the very next bar breaks it, the range expands again: there is no prior level left to serve as a target. That is why every 3-2 must be taken with the knowledge of a higher timeframe’s magnitude, and why it belongs with the other actionable signals only when that context exists.

Why the 3-2 booms

The 3 is a broadening formation. It shows the sellers were willing to sell lower and the buyers were willing to buy higher, inside one bar. That is aggression from the buyers and aggression from the sellers at the same time. The 2 is a directional trend. So a 3-2 pairs aggressive buyers and sellers with a directional breakout.

If the 3-2u is successful, it blows out all the short positions, because they shorted into extremely aggressive buyers and price is now trending away from them. The mirror holds for the 3-2d: it blows out all the long positions, because they bought into extremely aggressive sellers and price is now trending away from them. Either way one side is trapped, and the other side does not need a target to keep pushing.

3-2 reversal

Trigger: the opposite side of the outside bar. After a 3 up, the trigger is a 2d through the 3 bar’s low; after a 3 down, the trigger is a 2u through the 3 bar’s high. The 3-2 reversal most commonly occurs on the 60 and daily charts due to overnight gaps. It also occurs during periods of high volatility, when there is a vigorous change in continuity on higher timeframes.

3-2 continuation

Trigger: the same side the outside bar broke. A 3 down followed by a 2d through its low, or a 3 up followed by a 2u through its high. This is a play on the continuation of aggressive selling or buying. These commonly occur on the 5/15/30/60 of gapping stocks intraday (the same environment as the 30-60 gapper), as well as across the other four major timeframes.

Magnitude

Magnitude: none of its own, and that is the point. A 2-1-2 or a 3-1-2 hands you a measured target because the range contracted first. The 3-2 is the opposite. The outside bar already expanded the range, and the 2 expands it again, so there is no prior range to complete and nothing to measure to. What you have instead is one side of the market trapped in a losing position, and the only way out for them is through your entry. On the intraday timeframes, borrow the target from a higher timeframe: an intraday 3-2 continuation can target the completion of an outside day’s range, the same rule that governs the compound 3 and the momentum side of the 2-2. On the larger timeframes there is usually nothing above to borrow, because the outside bar is already the widest bar on the chart. Then the target is exhaustion, and a monthly or yearly 3-2 has months, sometimes years, before it can exhaust. The examples below show the boom in both directions: two names on two clocks to the upside, then three names on three clocks to the downside.

Execution rules

Entry: the last sale through the 3 bar’s high or low. This setup should go instantly. Stop: tight, right at the line you entered on, because the 3-2 lives or dies on price staying outside the 3. Never park it at the other side of the outside bar: a 3 is a broadening formation, and if price falls back in you can get a 3-3 all the way back through it. That stop is asking for a huge loss. Target: none of its own, so borrow the higher timeframe’s magnitude, then its levels of reclaim. Full treatment: Types of Reversals.

Related: 3-1-2 · 2-2 Reversal (3-2-2) · 30-60 Gapper · Compound 3
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