Back to Basics
After an absence of good channels and Fibs yesterday, we again have lots of good trendlines and Fibonacci relationships today. It’s too bad we didn’t have any range to go along with them — total high to low was 7.3 points.
We opened with a gap above yesterday’s high, and although it doesn’t show on this chart, if you were watching the pre-market trading it actually went just a bit over the 127% retracement of the distance from the previous day’s high to point #1 on this chart. But it only held the high for about a minute. A parallel to the gray upper trendline stopped the first drop, but the bounce didn’t go anywhere.
Another plunge out of congestion that looks much like a triangle gave us our second bottom pivot of the morning. That calls for drawing the yellow lower trendline, followed by the yellow parallel. Before seriously moving in that direction we had one more drop, reversing again at the 127% retracement of the move from point #1 to #2. Notice that the Stochastic oscillator gave a nice divergence for an entry there.
Divergences sometimes result in very quick moves, and it took only one bar to get up to the yellow parallel trendline at point “a.” Drawing the blue trendline from “x” to “b” gives us another quasi-triangle, but the move up didn’t make it to the blue parallel. But it still stopped at a logical point, resulting in a Measured Move. The distance from “x” to “a” is matched by the distance from “b” to “c”.
How do you know not to wait for price to hit the parallel trendline? What you do at Fibonacci levels, at parallels, and at any kind of support or resistance depends on your trading plan. Mine calls for always taking either partial profits or moving a stop very close at any potential support or resistance point.
A few weeks ago I was stressing the importance of leaving trendlines in place as long as they kept having an effect on price. Notice what happens with the long yellow trendline. From “a” until the long breakout bar the trendline acted as resistance, holding price down. After the drop from “c”, the same line acted as support. You’ll read that resistance becomes support after being broken, but most people don’t understand that the same is true of trendlines.
