Trading What I See

Echo, echo, echo …. This looks much like a repeat of Monday’s (8/28) action. A quick, tradable pullback followed by a day of sideways oscillation. The range was a little wider, and if you play divergences it was possible to catch several of the swings.

The pullback over the first 30 minutes gave a tradable entry as the moving averages showed a strong uptrend from yesterday. A very clear stochastic pattern marked this second rise through yesterday’s high (green line.) Five points later, and the moving averages start intertwining for the rest of the day.

At 9:30 (Pacific) there was what I call a weak DIVERGENCE for another long entry. [Weak because price didn’t make a lower low.] I wouldn’t take the stochastic signal half an hour earlier because it was below both moving averages. For that I will usually wait for a divergence.

The new high at 10:30 came on lower volume and with another stochastic divergence. By the time you get the bottom at 11:45 you could have recognized the pattern as a rectangle, and it bounced to the top of the range in a straight line. Once again, the clearest and best trades are coming in the first hour. Tomorrow and Friday may be non-events as everyone heads out for the last three-day weekend of the summer. I think I’ll join them and post again next Tuesday.

Fibonacci ratios often mark the end of moves, but the problem is seeing the possibilities in time to take action. Often a move will retrace more than 100 percent, and if so, the most likely turning points will be either 127% or 161.8% of a previous move. Or in today’s case, of a previous range.

Yesterday spent over five hours in a sideways pattern that was finally broken this morning. Where did the breakout fail. At exactly 27% above yesterday’s range (127% measuring from the bottom of the range.) It tried twice to break that level, reversing when the Consumer Confidence report was released. (No, I didn’t see this measurement in real time, but that’s why I study these charts every day after the market closes. Over time I catch more of them.)

I don’t tend to trade reports, but after the news pushed the market down there was a pullback entry (marked in yellow.) The trade was only slightly profitable, but look where it stopped. At 161.8% of the pullback. When it couldn’t push lower that was a good time to take at least partial profits.

Then the market waited for the Fed report which, as usual, caused prices to whip back and forth a bit before deciding to move higher. Once again there was a pullback entry if you were patient. No, I don’t see a Fib ratio there, but believe me, I looked. That’s the way to learn.

One-a-day may be the best prescription until after next weekend (Labor day). It seems as if every other day has a single good trade. And of course Friday brought down the average. Fifteen minutes into today’s session set up a nice DIVERGENCE trade. But unless you use something as sensitive as my moving averages, by the time you identify a trend, it’s too late.

I’ve put ADX on the chart, and it was just over 20 as the first trade triggered. But from my point of view, an ADX of 20 has to be rising to call a trend. This one was flat. I missed that first trade, not because of an ADX reading, but because I was so sure today would be as flat as Friday.

By the time we got to the next three pullback or divergence trades, my moving averages said FLAT. Good thing, too, because the trades had quite small gains, and I almost always lose money on those. Happy to be flat all day long. (Actually, I really would have liked that first trade.)

This morning I was sure I had identified a TRIANGLE pattern that immediately broke to the downside. Fortunately I require more for an entry signal. Sometimes the lack of a trigger is the only thing that saves me from a bad trade - prices quickly reversed back up through the “triangle.”

After what looks like a nice volume breakout, prices reversed again, back into yesterday’s ending consolidation pattern. At 8:30 came the only entry signal of the day. But it’s Friday. And it’s late August. And my longer moving average is flat rather than down. Pass on that.

That’s when I drew the two orange support/resistance lines on the chart, and decided I wouldn’t trade until they were broken. That only happened during the last hour of trading, and if you’ll notice by the volume decrease, everyone had gone home. Guess it’s weekend already.

When the Russell 2000 starts trading less than 10 points a session I find it pays to become extremely selective. Going back five days we have had ranges of 9.70, 9.40, 10.90, 6.80, and finally yesterday’s 16.60. Maybe things are looking up.

Maybe they’re not. All I could see today were several pullback trades with whatever small trend there was at the time. I use two moving averages to help define a trend. Since I like Fibonacci numbers, my short average is a 13 period simple moving average (sma) and the longer one a 34 sma. If price is under both, I consider the trend down. Reverse that for uptrends.

I wasn’t comfortable with the early reversal, but there was a short entry about 8 o’clock (Pacific) and a long entry about 11:00. I actually got stopped out on the short before it moved. Should have watched the nice yellow trendline. Call the day a scratch. Which is probably not too bad since we are back below a ten point range, and finished up near yesterday’s close.

This morning was an excellent example of why even day traders need to do some planning before the market opens. And how a little math will improve your bottom line.

The market opened almost unchanged, and then had a small surge to the upside. Considering the small ranges of the past two days (an inside day following an inside day) a breakout was not unexpected. But would it carry through?
The reversal occurred at a 127% retracement of yesterday’s range. [5-minute chart to show two days.] Most who use Fibonacci retracements seem to think they stop at 100%, but after the market completely reverses a move it sometimes goes just far enough to convince traders we are exiting a range. And as everyone jumps on board (look at volume), the market turns around. 127% is a typical reversal point.

Does that mean you should sell at that level? Of course not. Sometimes it goes to 162%. Sometimes it actually continues. But the break back through yesterday’s high (green line) or through yesterday’s close (blue line) said get out of long positions and consider going short to get into the best move of the day.

Although I’ve never actually traded a Wolfe Wave, I easily recognize them after the fact. But today I called this one right at the top. (Called it, but didn’t trade this one either.) The numbers on the chart are not Elliott waves, but the tracks of the Wolfe.
I first ran across this pattern in the Linda Raschke/Larry Connors book Street Smarts, but for more details check out Bill Wolfe’s web site. There are a lot of definitions of a “Wolfe” wave on the web, and mine is my own interpretation, but when they work they are impressive.

Look for three waves in one direction where point 4 pulls back into the area of the first wave. As in this example, the 5th point often overshoots a bit, so the entry is when price comes back down through the trendline. The key is the target, found with another trendline from point 1 through the bottom at point 4. Expect a reversal when price gets there.

In today’s market not only did we hit target, but a Stochastic DIVERGENCE gave the signal for another entry. Do Wolfe Waves always work this well? Does the market hand out free money? But I think I’ll spend this evening building a better Wolfe trap.