Trading What I See

If you’ve read this blog for very long, you know that, in addition to trendlines and channels, I’m usually looking for mathematical relationships — preferably several occurring at the same time. For example, I like trades where there is a 62% pullback that also contains a Measured Move to confirm a turning point.

But the relationships don’t have to limit themselves to price. Although for me it’s a secondary consideration, I also look for relationships in time. Today was a good example, but first lets look at the price setups starting with the morning gap.

Way back in 1932 Richard Schabacher (Technical Analysis and Stock Market Profits) wrote about gaps, and called the type we saw this morning a continuation gap. In 1948 Edwards and Magee (Technical Analysis of Stock Trends) gave a second name to this type of gap - a measuring gap.

As you can see, we’ve had a few years to watch this phenomenon, and somehow it just keeps repeating. Measuring or continuation gaps occur about half way in a move. Let’s add a little more information, this time from Victor Sperandeo (Trader Vic - Methods of a Wall Street Master.) Besides keeping these books within reach during the trading day, I have this Trader Vic quote on my desk.

If there is a gap, and it is going to reverse, it will do so 10 to 15 minutes after the opening 95 percent of the time.

This is a five minute chart — after the third bar, Trader Vic says the odds are in your favor. Can you find an entry to see if that was a measuring gap?

After the gap measurement was met we had a pullback. There was no reason to short there. Meeting a target is all about profit-taking, not about reversing positions. That comes at the next rally, when we had a nice divergence that matched a precise move to the 127% retracement of the pullback. I’m always looking for two reasons to take a trade.

Once the short sale was in position, there was no pullback large enough to cause concern until the 10:30 (Pacific time) bottom. And what reasons were there to change direction again? Lots of them.

Some traders like to take positions on filling 50% of a gap. I watch for this, but would never trade it in isolation. But in this case it matched a 50% retracement of the move that started yesterday. That’s enough to interest me, but there is something more involved.

Although the frequency of occurrence isn’t quite the same, there are Fibonacci time measurements that often hit the same numbers I watch in price. I particularly like trades where there is a 62% price retracement that takes 62% of the time of the original move. But I won’t refuse what we had today — a 50% price retracement that reversed at a 50% gap closure that took exactly 62% of the time of the rally.

As I’m sure I’ve said before, I really have trouble believing there is this much symmetry in the market. But that doesn’t keep me from trying to trade it.