Trading What I See

[NOTE:  The site crashed in early January 2011.  I just did a quick fix, so there may be some items that no longer work - Lowell]

After almost a year of writing Trading What I See, my daily commentary on day trading the Russell 2000 futures, it’s time to move on. I expect this will be the last entry for the blog, at least in its present form. Long term readers know I don’t try to predict the future.

The blog has fulfilled its purpose, as those of you that read the About section will understand. I started this project in August of 2006 as a way to enforce daily analysis of the markets. The goal was to further improve my trading, and that it has certainly done. Even if it is only for your personal viewing, it’s a process I recommend highly.

From comments and e-mails it seems that many of you have joined me in anticipating market reversals as the 127% external Fibonacci retracement levels are met, and taking profits as price completes a 100% or 162% extension of an initial move.

But after this length of time, most of the techniques I use are covered in the more than 200 posts I’ve made. The market is going to continue providing profits to those who learn to anticipate at least some of its twists and turns. These things don’t change, so I’ll be leaving this blog online as a resource of trading techniques. Here are some suggestions for its use:

If you know a term that I’ve used, there is a good search box in the right sidebar. Just plug in words like divergence, extension, retracement, rectangle, wedge, or breakout. When you’ve scanned the resulting posts, notice the Previous Entries link at the bottom as there are probably more results since I’ve limited how much will appear on each screen.

For more specific browsing, check the left-hand sidebar. You can use the calendar to check my comments for individual days, or look at posts a month at a time.  [Now on right - click back arrow]

For those of you discovering the site for the first time, or wanting to examine just how well these techniques have worked over the course of a year, follow this link to the original post from August 17^th, 2006, and you can use the Prev/Next Post above each commentary to look at almost everything I’ve written on this website.

I’ve enjoyed this journey and I hope some of my readers have too. This will allow me to devote a bit more time to my other obsession, photographing and writing about Natural History. If you like to explore the outdoors, take a look at Our Window on Nature.

And for everyone, take the time to really learn about the market, and then just Trade What You See.

Good Trading,

Lowell Christie

For those having trouble accessing the site yesterday, evidently the server holding Trading What I See was having high load issues. It took me several hours to post yesterday’s comments. When I checked, the web host was working on the problem. My access seems much faster today, so perhaps it is solved.
Lowell

Today the Russell 2000 had the fifth narrowest range so far this year — 5.9 points. And that range occurred right at the top of the daily rectangle. Actually this could be good news.

When price makes a continuous move from deep inside a pattern and then immediately breaks out, the odds favor a failure. Too much of the rally strength has been expended inside the pattern. However when there is a pause near a pattern’s edge, then a high-volume breakout is much more likely to succeed. But right now I’m waiting to actually see that breakout before I get excited on the upside.

Not much else to say on today’s action. We turned up at a Measured Move (C=100%) and developed a triangle formation. However the breakout had no volume behind it, and price reversed just above yesterday’s high before coming anywhere close to the triangle target. Not surprising with the lack of volume.

Another indication of the slow trading. The NYSE Tick ($Tick) never hit either a plus or minus 1000 today. I only watch the Tick at critical points, but most days one direction or the other will have some bias. And I would expect to see a high reading there when we finally break from this consolidation pattern. Maybe Monday.

There are several types of trend day, some easier to trade than others. Let’s start with the overall picture (15 minute chart), and then look for potential entries on the trading chart.

After the gap opening the market pushed right through the 162% level of a larger A-B-C. Whether measuring external retracements of the first pullback or the “C” leg of an A-B-C, passing the 162% level is where I stop looking for a reversal setup.

The next stop is often the 262% Fibonacci level, and that’s where we reversed at the end of the day. We’re back at the top of the daily rectangle, where we reversed four days ago. Was this a Spring reversal? We exceeded the top price from the rectangle by one tick.

I would be cautious of a gap up tomorrow that quickly reversed, but a continuation of the closing pullback followed by an upside breakout with volume could head for the rectangle target over 30 points higher.

Did I just say we could go either way? Don’t I always? Let’s see what happens in the morning.

Now, how could you have caught this move? First remember the quote from Victor Sperandeo that I’ve used often.

If there is a gap, and it is going to reverse, it will do so 10 to 15 minutes after the opening 95 percent of the time.

By the first pullback this morning we had exceeded a potential 162% A-B-C which means you should expect continuation. We had also exceeded Trader Vic’s 15 minutes without a reversal. Two reasons to look for upside action, so what we needed was a usable entry.

For entries in a trend I usually look for a bounce off the bottom of a parallel trend channel, or a pullback to a Fibonacci level measured from a major pivot. It didn’t take very long to realize that neither of these two methods would work this morning. So instead, I used the opening price to start my measurements.

From “A” to “B” was a 62% retracement, but the next three hours progressed so slowly it made the trade seem like a mistake. Without any good basing points my procedure is to gradually move my stop up with each new pivot (yellow lines), with an exit shortly after “C=100%.”

After that slow 5+ point rally, I was surprised by the afternoon move and didn’t even consider an entry. But at least we are out of the sideways action of the last two days. Tomorrow we’ll see what happens with the rectangle.

Once again we got through the first hour without a setup that fit the trading style I show on this blog. Unfortunately, during summer trading that happens much more often than I would like.

It’s not that there are no possible trades on today’s chart. It’s just that when trading in congestion I’ve found that I have many more losing trades that tend to wipe out all the gains from the winners. So I’ve developed several methods to help me define congestion, and learned to live with missing the occasional strong move that sometimes occurs on a breakout.

I define congestion as times when the ranges of a long series of bars overlap that of a single bar. Often I’ll use a longer time frame to watch for this situation. Here’s a post from last year called Overlapping bars equal congestion that shows what I mean.

Back in February in a commentary called Non-Trading Tips I showed a two-day period where, on a fifteen minute chart, almost every bar in the trading day fell inside the range of the first bar. That’s extreme sideways action, and my avoiding trading yesterday and today are just extensions of that method.

Where there is no tradable action in the first hour, unless there is a runaway move, I assume we may be starting a period of congestion. When I mark off that first hour range, I’m just simulating a longer chart on top of my trading chart.

If you’ve followed the earlier links and understand the general concept, take a look at a 45 minute (or hourly) chart from today and you’ll see that EVERY bar today touched the range of the first bar.

You need to decide whether breakeven trading during congestion is worth catching the occasional good move. Personally, I’d rather wait for the stronger setups during intraday trends.

Evidently the market decided it wanted to spend some more time working inside the daily rectangle. In fact, today we dropped back almost to the center of the pattern. With a gap down opening, price built a floor just under the 850 level and went sideways until after the lunch hour.

When there was no trade in the first hour, I marked off the range and waited for a breakout (A) and a possible pullback (B.) Then I passed the trade that turned into a Measured Move.

On pullback trades I want to see a decrease in volume before I’m comfortable with a trade. Sometimes volume doesn’t make a difference, but over time I get better consistency when I insist on either correct volume or multiple reasons to take a trade. At least I got a lot of paperwork done today.

After opening with a small gap above yesterday’s high, the market immediately reversed on the first one minute bar and closed the gap (not shown.) That looked like a Spring setup, but there was no confirmation — no Fibonacci level or divergence for the top.

The next two minutes reversed the reversal, and then the market topped out at the 127% Fibonacci external retracement. For those new to the site, that’s a measurement that retraces more than 100% of the previous move, shown on this chart with white arrows early in the morning and again in the afternoon.

Any time the market exceeds a previous pivot you should mark off the 127% and 162% external retracements, since these are the two most likely levels for a quick reversal. If we exceed 162% that’s a good indication that the move will continue for a while.

The turn at the high created another Spring setup as we broke through yesterday’s resistance but immediately reversed. This time the reversal occurred at 127% so there were two reasons to enter a short sale. If you missed that entry, the pullback at “B” was at a 50% retracement of the early decline. I like to enter after Dunnigan blue reversal bars if there is another good reason, since that often acts much like the Spring setup.

An A-B-C pattern (shown in blue) will often turn at 62%, 100%, or 162%. The two bar hesitation at 7:30 was at 62%, but there was no actual bounce. We went through 100% without a pause, and finally made the low of the day at 162%. Nice morning trading.

For the next four hours I can’t find an entry I like. I expect early pullbacks to be 50% or greater, but it never happened. I have a nice parallel trend channel marked in yellow, but without an entry you can’t trade it.

But it does point out the afternoon top, which is also a 162% external retracement and another refusal to move upwards after again breaking yesterday’s high. Not as clear as the morning reversal, but I would still consider it a Spring.

You might take a look at the daily chart before tomorrow’s open. We’re back at the high of a rectangle that has lasted over a month. For longer term traders tomorrow might be decision time.

The market made an immediate reversal just after today’s opening, and declined for the next 30 minutes to the eventual low. Without any pauses there wasn’t much chance for a safe entry. And without any pullbacks there were no internal measurements to pinpoint the bottom.

So even though we turned at a 78% Fibonacci retracement level, by the end of the first hour I had found no tradable setups. That’s when I drew the magenta bars to mark off the first hour’s high and low, and although we broke out of that range there were still no clear entries.

Finally at the pivot marked with a circled “4″ there was a potential entry. As I said yesterday

where there are two pullbacks in a move, the first one will usually be large (most often 62%) and the second one small (38%.)

Of course the movement over the next hour was just sideways so I gave up on the trade. I should have remembered that we are now into the summer trading season where many of the moves seem to happen in slow motion.

During this season it’s often useful to pay more attention to (but not necessarily trade from) the longer term charts because many of the patterns are extended. Even a move from a three to a five minute chart can clarify moves, since you can include more of the previous day’s trading.

By including part of yesterday’s move on this five minute chart you can see the structure of an Elliott impulse wave. If you realize that Wave Four is often a long drawn-out affair, it might increase your patience in this type of a trade. Remember that I don’t actually trade Elliott Waves as such, but much of what I present on this site is derived from Elliott principles.

There’s another reason to illustrate an Elliott Wave today. Last night I received an e-mail from Elliott Wave International. When they found some of my Elliott comments on Trading What I See during a Google search, they asked me to become one of their associates.

Doing so allows me to put up some links (left sidebar) to free information they offer on their site, such as a very nice 10 lesson Elliott Wave tutorial. For those of you interested in Fibonacci and market structure I highly recommend it.

If you follow any of those links, you’ll have to sign up for Club EWI which puts you on their mailing list. Fortunately they don’t send out material excessively. But it’s a no-cost way to learn more about how the market works (at least some of the time.)