Early Warning
The first few minutes of today’s trading was an early warning that it might be a day of congestion. In fact, it turned into an NR7 day — the narrowest range in more than the last seven trading sessions.
The chart on the left shows what I was looking at as the market opened. This is a one minute chart of the $OEX and the $MID. The $OEX (yellow) is the S&P 100, and as you can see, it was trying to rally. The $MID (red) is the Mid-cap 400, and it was dropping fast. Put the two together and you get the S&P 500.
When these two indexes are trying to move in opposite directions, you usually get a sideways movement in the larger S&P and in the market as a whole. This is a very short-term measurement, but today we went sideways all day long.
Which doesn’t necessarily mean there were no trading opportunities. Just a lack of sustained moves. In fact there was a high probability/low risk entry fifteen minutes after the market opened as a number of price measurements produced a nice Fibonacci cluster.
The second chart shows part of Thursday, all of Friday, and the early action from this morning. There were three clear Fibonacci extensions that all pointed to the same spot on the chart, labeled as point “T” for Target.
A Fibonacci extension (also called an Alternate Measurement) compares two consecutive moves in the same direction. The most common ratios are when the second move is either 100% (a Measured Move) or 62% of the first move. Occasionally the ratio will expand to 162%.
I’ve marked these ratios with colored lines, and at point “T” it shows the actual length of the second line as a percentage of the first. Using the yellow lines as an example, if you measure from point “1″ to point “2″ and multiply by 0.62, you will get the distance from point “3″ to point “T”.
All of these were just potential reversal points until after the opening. The market then rallied up to point “7″ and dropped exactly the distance it had fallen Friday (from 5 to 6), which gave three Fibonacci extensions occurring at the same level.
Two other factors now came into play. One is shown in magenta on the chart, as price has retraced 62% of Friday’s rally — again a common Fibonacci number. And not shown on the chart is the divergence in the Stochastic oscillator at the same time.
Should you trade this type of pattern when the early warnings said possible congestion? It depends on your trading style. Personally I will only trade if I have simultaneous signals and can use a very close stop. But I have a chart posted next to my computer showing my most profitable trading day ever. The Russell (although at a lower price level) only traveled five points. But every trade had multiple signals.
