Another small range day, but still the signals are there for potential trades. And as important, to keep you out of bad entries. We started with an attempted rally.
I look at 127% retracements as potential danger levels. When we reach that measurement and I’m not in a trade, I’m very hesitant to enter. Too many reversals occur there or at the 162% level. This morning that’s where point “3″ held and we went into a sideways pattern.
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.
If you missed the Spring, remember my general rule about pullbacks in a new trend. The first pullback will be relatively large (at least 50%), and a later pullback will more likely be 38%. Point “5″ turned at the 50% level, with the moving averages acting as an entry trigger.
If you entered at either “4″ or “5″, you should be watching retracement levels to either exit or take partial profits. The actual turn (point 6) came at an 89% pullback from the rally that started at point “2.” We’ve been seeing that as a Fibonacci turn quite often lately in the Russell 2000.
The move from points “6″ to “7″ is instructive. We’ve already had one pullback, the next move down is larger than the first, and that often leads to one more move in the same direction. Three items make point “7″ a logical entry for another short sale. First, the volume on the rally doesn’t pick up at all, even though there is a wide ranging bar. Second and third, we turn at exactly the 38% retracement, AND at a parallel trendline.
There was some violent movement after that, so you might not have been able to hold through the actual bottom, but that occurred at another 127% measurement (with a slight overrun.) Another important thing to notice. The two highest volume points for the entire day (ignoring the normal high-volume opening) were at the top and bottom reversals. That is not unusual.
Volume can be hard to interpret, but it’s much too important to ignore. Consider it just one more signpost on our trading map of the market.
