Trading What I See

The opening gap (4+ points) looked like it was going to continue down, and there was a strong temptation to chase the move. Whenever I get that feeling I just remind myself that when I think I know what is going to happen, I am usually wrong. It misses a few good trades, but overall saves me money.

At about 7:30 (Pacific) we got a pullback with an overbought Stochastic oscillator with an entry some time after point #1. Then came a very slow move down to point #2. Remember that when a second move has much less momentum than the first, the target is usually 62% of the original move. It overshot by about six ticks. Here’s why that was the only trade I took today.

I spend most of the day drawing and erasing trendlines and Fibonacci measurements, because these are things I trust. Combined with several other indicators, they give me almost all of my setups. They also tell me when not to trade. Point #1 was a 25% pullback (not a Fib) from yesterday’s high and a 50% pullback from the high of the first bar. Combined with the Stochastic that was an acceptable trade. But then the market refused to go down.

Between point #1 and point #2 I drew and erased several trendlines, ending with what you see on the chart. Notice that the lines converge. Although the volume is wrong, it looks too much like a WEDGE, which is a reversal pattern (see earlier post on Wedges.) Another problem was the half-hour bar ranges that I watch.

Because of the gap, volume was running higher than normal, but look at the ranges of the first four 1/2 hour bars when compared with their averages: 100%, 44%, 66%, 66%. There was also an absence of heavy selling in the NYSE tick readings. Time for me to watch rather than trade.

The patterns played out, but with limited enthusiasm. The “wedge-like” pattern hit its target (blue arrow), and price stalled at the 127% retracement of the #1 to #2 measurement. (This was also the first 1000 tick reading of the day.) After a short pullback price moved to the next Fibonacci level — 162% and another plus 1000 tick reading — and stalled again. The pullback to point #3 would have been a nice entry on a better trading day.

Notice that the normal Fibonacci external retracements of 127% and 162% were good profit taking targets (if you were in the trade), but they didn’t stop the overall move. Too many traders don’t trust Fibonacci levels because they don’t always work. In real trading they give you “potential” reversal levels, just like other forms of support and resistance.