Trading What I See

When you look carefully at the markets, you’ll find that the various methods of technical analysis tend to find similar exhaustion and reversal points. That’s why two traders, using different methods, will often end up with similar trades. Today provides a good example, combining support and resistance, Fibonacci measurements, and trend channels.

Let’s start with a slightly wider view to include the last of yesterday’s action. Notice that we closed inside a rectangle pattern (at least two touches of both top and bottom.) This set up support and resistance zones that should be watched if we get back into that range.

We gapped below yesterday’s low (barely) and soon reversed back above it. Yes, that’s the Larry Williams Oops! pattern once again, and today it worked out nicely. The first pause was at what I have labeled Support. Remember that if you are below a support/resistance level it is considered resistance. If you are above it, we call it support. See it act as resistance at 6:45, and become support 45 minutes later?

Then we moved up to the next resistance level. For the Fibonacci players, that was a logical stopping point. We turned at the 62% Fibonacci extension (62% of the first move), which exactly corresponded to the resistance from yesterday. And if you look back at yesterday’s post you’ll find I said that stopping at the 62% level often means we haven’t finished the move in the opposite direction. So after a false break to the upside, we came back down.

Where do we stop? How about at both the support level and a Fibonacci 50% retracement. If you wanted that trade (which I didn’t) you could expect trouble when we got back to resistance. And that’s what happened. But now that we have a pivot, we can draw the lower blue trendline. And a trendline is always more useful if you draw the parallel to make a trend channel.

For any that don’t mind low volume breakouts, we moved up for a while. But notice where we stopped. Look at the white lines and you’ll see an analysis technique I often use. Measuring from the false breakout to the lower pivot, I multiply that number by both 127% and 162%. Then I use these numbers to measure a retracement.

I’m watching for a potential reversal at these two points. See how we turned down briefly at the 127% level? But where are we in relation to the parallel line? Still quite a ways to go. So although I may take partial profits here, I will try to hold some of the position for a larger gain. (For chart pattern players, the measurement using the support/resistance points would also target the 775 area!) I would be using the shorter moving average for my protective stop, and would exit as price reached the combination of 162% and the upper parallel trendline.

Fibonacci, support and resistance, trendlines, and all of the other items in the technical trader’s arsenal are just tools for decision making. The challenge is using the right tool at the right time.