Trading What I See

I’ve gone to a 15 minute chart to show the context of today’s trading, and because the best trade of the day isn’t obvious on a shorter timeframe.

The eleven bars before point #1 represent the almost three hours of sideways movement from yesterday afternoon. The support is from yesterday’s low. The opening gap broke through the yellow trendline with two anchor points set up during that congestion. Within a few minutes we broke the blue 2-day trendline, and then bounced from the support of yesterday’s low.

And then came the only reasonable trade of the day. If you caught it. And I didn’t. And I have no excuse, because that is a beautiful example of Trader Vic’s 2B SETUP which I’ve posted about several times recently. A trendline break late yesterday, a reverse and penetration of the pivot low this morning, and then a reversal back up through that same pivot.

Any time you have a breakout failure, you must at least consider a potential trade in the opposite direction. Because if the change in trend continues, everyone that shorted that break has to cover their position. That’s why the rally went up so fast.

But (quickly changing the subject away from my missed trade) this chart brings up a touchy point about trendlines. Many traders that I highly respect say that a valid trendline cannot go through prices. I want to show you why I disagree.

The first bar today moved down fast, but there was no reason to consider the move unusual. However look at point #3 and beyond. The market, with four more touches so far, thinks that the broken trendline is still valid, and so do I.

There’s a lot to learn with a careful study of trendlines, so let’s continue at point #2. The rally ran into resistance at a logical point, and then started easing down. This is where I stopped looking for trades, for now we were within converging blue trendlines. At first I though it was a large triangle, but the volume pattern changed my mind. Still, converging trendlines should always be seen as a caution signal.

I think people were waiting for the Phily Fed release, since it moved the market so much last month. That occurred at the blue bar, with prices first dropping and then going the other way. When they came back up, they pierced the trendline. Although that volume bar looks a little tall, most of it came on the first downmove, not on the breakout. Upside breaks through trendlines are not to be believed without volume increases, either on the break or immediately afterwards.

Most people will shift the angle of their trendline here. But if you do, you may lose some very valuable information. See how price acts as though the blue line doesn’t exist. That shouldn’t happen. Trendlines tend to be stronger than that. Either price respects them, or it pushes through with a spurt of volume. But when price ignores a trendline, you can be pretty sure that a triangle is forming, and sometimes this gives you a very early warning of congestion ahead.

The breakout at point #4? That came after the stock market closed — futures trade for an additional 15 minutes. Upside breakout — not! No volume there.

I’m not saying don’t change trendlines. I’m saying that as a trader you must make a decision about where a trendline goes. If you can’t decide right now, draw two. Then erase one later. Broken trendlines don’t necessarily stop being valid, even when price goes far beyond them. Keep watching and I’ll give you some examples as I see them.

Oh, and don’t forget — remember 2B.