Trading By The Numbers
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.
[…] Finally at point “4″ we got the first valid signal - a Wyckoff “Spring,” where price breaks out and immediately reverses. I like this trade because you can normally place a very close protective stop. And when they work, these trades often catch the very beginning of a reversal for maximum profits. […]
[…] On a longer term chart (15 minute) this created a Wyckoff “Spring” setup. I like these because they often catch almost the exact bottoms of reversals, and they allow very close stops. […]
[…] Just before yesterday’s close, price spiked to a high for the day and reversed through a rising trendline. I’ve marked in yellow a Wyckoff Spring and divergence for a short sale setup, but it was far too late in the day to take any action. The trendline break occurred during the 15 minutes that futures trade after the regular market closes. […]
[…] But by the time we get to point “B” things have changed. Point “A” was a lower low, so the trend is now sideways. Point “B” becomes a test of the top at point “3″, and since “B” is slightly higher than “3″ it could be considered a Spring top. This divergence creates a short sale setup, with the trigger being the break of the blue trendline and the moving averages. […]
[…] Point “C” also created a Wyckoff Spring, since point “A” marked the level of the lows for the last two days. A Spring is where an important support level is broken and the market, instead of continuing, reverses back through that level. […]
[…] That would be enough to take a long position at today’s bottom, but to give some added assurance, the entire formation set up a Wyckoff Spring reversal that I mention from time to time. That always translates into a close initial stop. […]
[…] This morning we dropped to the bottom of yesterdays “pattern”, came back up to the top and “broke out.” And reversed. That was a potential trade, turning down at the 127% external retracement of the morning drop. It matched a divergence in the Stochastic, and formed another Wyckoff Spring entry. […]
[…] These 127% levels often appear as a Spring formation where price breaks to a new high or low and is unable to continue. When this occurs along with a Stochastic divergence you have three indications of a potential trade. Then it just depends upon your entry technique. If you get a trigger, you have a trade. […]
[…] The market opened without much volume and tried to break out above yesterday’s high. To be convincing, breakouts need volume, and without it the reversal wasn’t all that surprising. A breakout that immediately reverses is called a Spring, and I find a tradable example several times a week. […]
[…] There were three reversal indications at the bottom. First we hit the lower trendline. Second, price had reached the 127% external retracement of the last rally, which is often a turning point. And third, the reversal formed a Spring by breaking a support area and immediately reversing. A divergence would have been nice, but not really necessary. […]
[…] The opening price gapped above yesterday’s resistance, and on the second three-minute bar we reached the 127% level. And when we shot back down through the resistance line it created a Spring reversal. […]
[…] The A-B-C move met resistance at 162%, and bounced along a rising trendline until the close. That last little fakeout/breakout just managed to close the gap, and if this had happened early in the day I would have traded the reversal as a Spring. […]
[…] We started with a small surge to the upside, breaking through yesterday’s high and reversing. When a market breaks through resistance and can’t continue, it will often create a Spring setup. The next hour retraced yesterday’s final rally and stalled at a support level that was already on the chart. For a while it looked as though we were finished for the day. […]
[…] Today there was a nice Spring setup that failed. But let’s start at the beginning. There were two Measured Moves, first up and then down. A Measured Move is just an A-B-C pattern when the “C” leg is the same size as the “A” leg. […]
[…] After a nice Spring setup just after the open (complete with a Stochastic divergence), price re-visited a resistance area created yesterday, making a third reversal at exactly the same level. Although there is only a single bottom pivot, I’ll probably start to treat this area as a potential rectangle. […]
[…] Because of the extra holiday data, I wouldn’t even be looking for a trade near the open. The first clear setup would have been the short entry at today’s high. Price completed an A-B-C with the “C” leg being 62% the length of “A.” A second indication was that a reversal there would form a divergence with the Stochastic oscillator. And you could see that if the trade triggered (first red bar) the setup would turn into a Spring. […]
[…] Today we started with a quick double fake-out — up, down, and then the rally. The move created a Spring entry combined with a 127% retracement of the quick upmove. After moving to what would later be labeled “A” there was a 50% pullback which eventually turned into a double bottom. […]
[…] Spring Reversal By Lowell Christie After a well structured five wave move like we had yesterday, a reversal of some sort is common. Not required, but certainly not a surprise. So when the market created a Spring setup at the open, the first red bar could be an entry for a short sale. […]
[…] The turn at the high created another Spring setup as we broke through yesterday’s resistance but immediately reversed. This time the reversal occurred at 127% so there were two reasons to enter a short sale. If you missed that entry, the pullback at “B” was at a 50% retracement of the early decline. I like to enter after Dunnigan blue reversal bars if there is another good reason, since that often acts much like the Spring setup. […]