Trading What I See

Other traders often question whether the techniques I use will work on other timeframes. Not everyone wants to be stuck in front of a monitor for over six hours every day. It turns out that both today and this week are great examples showing that the market is fractal - that the same techniques will work from tick charts all the way up the scale.

We’ll look at three charts today to see where we stand in the market, and perhaps to explain why we turned down on Thursday, and then found at least a temporary bottom this morning.

The first chart is a daily, with lots and lots of arrows on it. I’ve mentioned before that it is a misconception that trendlines should never pass through price. Here’s one example. Since early August the daily chart has been bouncing around inside of two channels, one inside the other. The blue arrows point to hits on the inner channel, while the yellow arrows show touches of the outer one. The four blue trendlines are exactly parallel.

And what tends to happen when you hit the top of a channel as we did Wednesday and Thursday? Quite often it’s time to have a correction of some sort. Down to the bottom? I don’t know. But I’ve been watching this channel for weeks, and this pullback was not unexpected.

Chart number two is a 30-minute timeframe to illustrate both channels and some Fibonacci concepts I’ve mentioned before, but without good chart examples. First the Fibonacci. I’ve said that the most common reversals happen at 127% and 168% external retracements of moves, often retracements of corrections. But if the market doesn’t stop there, you draw in the 262% and the 425% Fib retracements. A good move will go to the 262%.

A panic move will often reach exhaustion at 4.236 times the first correction, which I sometimes simplify as 425%. Do you remember that powerful rally we had on Tuesday? I’ve heard several rumors of why it happened, but to me it looked like panic buying. And wasn’t that a nice divergence right at the top?

Where did we bounce this morning? Right at the up trendline, as we should. I actually saw this on my 15 minute chart after the gap down, and had to enlarge the chart to see where that blue line was coming from. Remember, don’t be too quick to erase old trendlines.

Notice the thin blue parallel I’ve left on this chart. Most people would have erased it and said it didn’t work. But if we rally to a new high from here, watch out when we get to that line. That’s not a prediction, because I try not to make them. But you might want to mark it on your charts just in case.

Now a quick review of today from chart number three. We ended yesterday with a triangle, shown in yellow. Where do triangles like to go when they break out? How about to the parallel of the non-breakout side. That’s point C at the bottom of the chart. Just where we ran into the 30 minute trendline. And just where we had a Measured Move (X to A equals B to C.) And just where the Stochastic gave a nice divergence. How many signals do you really need?

So then we go up, and again we’re in a parallel channel. Just to add a little more to a very geometrical week and day, the move from the bottom to A was duplicated into the close by the move from B to C. Another Measured Move.

More charts than usual today, but there were a lot of nice moves to cover. If this type of analysis is helpful, consider using the link below to e-mail this post to a trader friend.