The 2DLV Setup: A Powerful Bounce Pattern for Traders

The 2DLV Setup (2 Days Lower Volume) is a stock trading pattern that identifies opportunities where a stock pulls back after an explosive upward move, creating an ideal entry point for traders looking to capitalize on momentum. This setup combines price action, volume analysis, and moving averages to provide a clear edge in trading.

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What is the 2DLV Setup?

The 2DLV Setup occurs when a stock that has experienced strong upward momentum begins a multi-day pullback, creating a chance for traders to buy at support before the next leg higher. The setup can arise in two main ways:

1. A Steady Grind Followed by Acceleration:
   • The stock starts with a steady upward grind over several days or weeks.
   • Eventually, it “speeds up” with larger price moves and an increase in volume.
   • The stock must move at least 5% or more during this acceleration, with volume exceeding 10M+ shares.
   • These setups are often the most reliable, as the gradual grind shows healthy accumulation before the big move.
2. A Big Thrust of Volume and Momentum Off News:
   • Sometimes, the stock skips the grind and surges upward with heavy volume and momentum in response to news or catalysts.
   • The move still needs to be 5% or more with volume above 10M+ shares.
   • While these setups can still work, the ones that grind first tend to be higher probability.
   • For smaller-priced or smaller-cap stocks, a big push off news followed by a pullback on the second day with lower volume than the first day, and an inside day with even lower volume on the third day, can also work effectively as part of the setup.

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The Three Phases of the 2DLV Setup

Phase 1: The Initial Move Up

• The stock either grinds upward steadily or explodes higher with momentum and volume.
• Volume expands significantly, often reaching 10M+ shares, and the stock must move 5% or more during this phase.
• The first occurrence of this pattern tends to be stronger than subsequent setups, unless the stock is moving to higher prices or trending more slowly in subsequent attempts.

Phase 2: The Multi-Day Pullback

• After the strong move up, the stock begins a 2 to 4 day pullback:
  • Volume declines each day during the pullback, signaling that selling pressure is drying up.
  • Price remains above or near the 10-Day Moving Average (10DMA), a critical support level.
  • The pullback can vary in depth, but it is important that volume continues to decrease each day during this period.
  • Smaller-cap stocks or lower-priced stocks that pull back to the Day 1 gap-up lows or nearby support levels have a higher chance for a bounce as long as all other criteria are met.
  • If a smaller-cap stock is below all moving averages, it can still follow the 2DLV setup, and the 200-Day Moving Average (200DMA) can act as a key support level during the pullback.

Phase 3: The Bounce

• Once the pullback ends, the stock bounces off support and resumes its upward momentum.
• The bounce at times may mirrors the same dollar value or more as the initial leg up, providing a predictable and high-reward target for traders.

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Key Observations About the 2DLV Setup

1. First-Time Setups Are Stronger:
   • The first time the 2DLV Setup occurs during a trend is typically the most reliable and explosive.
   • If the setup repeats, it tends to be less effective unless the stock is at higher prices or moving more gradually.
2. Grind Versus Big Thrust:
   • Setups that occur after a steady grind followed by acceleration are often higher probability because they indicate sustained accumulation.
   • Stocks that surge upward with heavy volume off news can still produce quality setups, but they are often less consistent.
   • Smaller-priced or smaller-cap stocks can work with a big push off news followed by a pullback on the second day with lower volume and an inside day with even lower volume on the third day.
3. Volume Decline During Pullback:
   • The pullback phase is characterized by a decline in volume each day, signaling that selling pressure is weakening and a bounce is likely.
   • Price should hold above or near the 10DMA, a key support level for confirming that the pullback is healthy and the trend is still intact.
4. 5%+ Move with 10M+ Volume:
   • The stock must move at least 5% or more during the strong upward move, confirming real momentum.
   • Volume during this phase must exceed 10M+ shares, signaling significant buyer interest.
5. Support at the 10DMA:
   • Throughout the pullback, price holding above or near the 10-Day Moving Average is critical for confirming strength.
   • For smaller-cap stocks, the pullback may touch the Day 1 gap-up lows or support, increasing the chances of a successful bounce.
   • If the stock is below all moving averages, it may still follow the 2DLV setup and find support at the 200DMA during the pullback.
6. Lower Price, Smaller-Cap Momentum Stocks:
   • The second leg of the move often mirrors the first leg more reliably in lower-priced, smaller-cap momentum stocks. These stocks tend to exhibit more predictable patterns and stronger price reactions during the pullback and bounce phases.
   • Smaller-cap stocks that pull back to the Day 1 gap-up lows or nearby support have a good chance for a bounce, as long as the stock meets all other criteria, including decreasing volume and holding above the 10DMA or the 200DMA if it’s below all other moving averages.
7. Hourly Chart Application:
   • The 2DLV setup can be applied on both the daily and hourly charts, offering flexibility for traders who prefer shorter time frames or are trading in more volatile environments. The pattern works similarly, with volume decreasing over consecutive days (or hours) and price holding support before the bounce.

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Why the 2DLV Setup Works

The 2DLV Setup works because it reflects key elements of market behavior:

• Volume Decline During Pullback: Lower volume on consecutive pullback days shows that sellers are losing control, and buyers are preparing to step in.
• 5%+ Move with Heavy Volume: A strong upward move with significant volume indicates real momentum and buyer conviction.
• Accumulation Before the Move: The steady grind before acceleration often indicates strong hands accumulating shares, increasing the odds of follow-through.
• Momentum Confirmation: The bounce after the pullback confirms that buyers have regained control, resuming the upward trend.

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Important Note: It’s Not Guaranteed

While the 2DLV Setup has a high probability of success, it’s not a guaranteed strategy. There will be times when the pattern fails due to unexpected market conditions, weak bounces, or stronger selling pressure. Risk management is critical to protect capital when the setup doesn’t work as planned. Always use stop losses and size positions appropriately to account for potential failure.

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Key Checklist for Identifying the 2DLV Setup

To spot a 2DLV Setup, look for the following:

1. Strong Prior Move Up:
   • Either a steady grind followed by acceleration or a big thrust off news.
   • The move must be 5% or more with volume exceeding 10M+ shares.
   • The first occurrence of the setup is often stronger than repeats unless the stock moves higher or slows down.
2. Multi-Day Pullback:
   • The pullback lasts 2 to 4 days.
   • Volume declines each day during the pullback.
   • Price remains above or near the 10DMA or 200DMA (if the stock is below all moving averages).
   • For smaller-cap stocks, the pullback may touch the Day 1 gap-up lows or support, increasing the chances of a successful bounce.
3. The Bounce:
   • Look for the stock to bounce off support and resume its upward trend.
   • The bounce at times can mirrors the dollar value of the initial leg up.

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Why I Love the 2DLV Setup

• High Probability: The setup combines multiple reliable signals: volume decline, pullback to support, and momentum resumption.
• Clear Rules with Flexibility: While the pullback depth can vary, volume must decrease each day to confirm a healthy pullback.
• Defined Risk and Reward: I can set tight stop losses near the 10DMA, 200DMA or LOD while targeting significant upside.
• Momentum Resumption: The bounce confirms buyer strength, creating a powerful entry point.

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The 2DLV Setup is a pattern that allows me to capitalize on momentum with a strong risk-reward ratio. By combining price action, volume analysis, and moving averages, this setup offers a repeatable edge for identifying stocks ready to resume their upward trends. However, it’s important to remember that no strategy is perfect, and disciplined risk management is essential.

Attached below are a few setups I have observed over the past few months that reflect the strategy outlined above.