Trading What I See

Some days the market will get into a rhythm, and if you are watching closely you can take a few nice trades before the pattern breaks. And often these rhythms will provide recognizable patterns that offer relatively clear entries.

We started with a quick move down that reversed at the 50% retracement of yesterday’s last rally. After a nice run to the upside, we turned down at very close to a 100% measured move. But as that move was ending it created a small pattern you can sometimes turn into a nice trade.

I call it Three Pushes, but it’s certainly not my discovery. Jeff Cooper and Larry Pesavento call it the Three Drives Pattern (although Larry has Fibonacci requirements for it also,) and Linda Raschke calls it Three Little Indians. All require some symmetry to the pattern.

In this case the symmetry is in time. The three peaks that end the move are an equal distance apart (seven bars), and the look is similar. I like the pattern to have a divergence, and if you look at the Stochastic, there is a nice one. Time for a correction.

It’s a little harder to see, but the move down also ended in a symmetrical setup — this time each bottom is exactly nine bars apart. Neither of these by itself would convince me to trade, but the top also had met a Measured Move target and had the divergence, while the bottom reversal turned right at a 62% retracement AND a 162% Fibonacci extension.

The following rally also ends at a Fibonacci cluster. It retraced 78% of the drop, and made another 162% Fibonacci extension. There was no danger of entering early at a 62% retracement, because the market didn’t slow down there. The Stochastic has also reached a clear overbought condition, and we made a swift move down to a longer term trendline copied from a 15 minute chart.

The next action is a setup I like but often have trouble entering, usually because I am still in a trade in the opposite direction. Richard Wyckoff (a trader from the first half of the 20th century) called this pattern a Spring. It allows a close stop, and often results in an explosive move.

Notice the strong support line (yellow) connecting the last two bottoms. A Spring will break support, and almost immediately reverse. Anyone that opened a position on the break will immediately be losing money, and as they close their positions the market will make a fast move. And notice the nice divergence in the Stochastic.

By this time you can observe the market in a nice cycle mode. The distance between bottoms has been 43 and 40 bars, and the two tops were 38 bars apart. When this bottom comes at 40 bars it’s time mark your charts for the next potential reversal. And that is what happens, as the market goes into rectangle mode. (And another Spring to make sure you caught the move.)

Will the time pattern continue? Who knows. You have to be careful not to depend on cycle patterns, because they have a habit of disappearing with little notice, but you should treat them like you treat trends — trade them until they end.