Market Memory
You always wonder whether a long weekend will make a difference. Will Fibonacci calculations still work using the old data? Do you have to change your trading tactics?
Last week we had slow holiday trading. Then we had a day off for New Years. Yesterday there was a market closing for a state funeral. Today the market continued from where it left off as though there were no break at all.
Let’s start with a 15 minute chart to show some measurements. The gap this morning went up to the high of last Friday and couldn’t get any higher. Even on a 3 minute chart, no bar was able to close above that level (point B.) When we get to a shorter term chart you’ll even find a divergence there.
If you are not already doing it, always mark in the highs and lows of the last few days — most software packages will do this for you, but if not, draw them in by hand. Like Fib levels and trendlines, how the market acts at these levels is critical trading information. When the market couldn’t break that level and it corresponded to failure at the yellow down trendline, your trading bias should have switched to the short side.
Still working from last week’s data, the turn at point “C” happened at a logical set of Fibonacci measurements. The distance from “X” to “A” multiplied by 1.618 is exactly the distance from “B” to “C.” That’s called a Fibonacci extension, and the most common measurements are 0.618, 1.00, and 1.618.
And whenever price exceeds a previous pivot point (passing point “A”) you should measure external retracements — those are retracements over 100%. The most common is 127%, but if price doesn’t stop there it is likely to go to 162%. Point “C” just slightly exceeded a 162% Fibonacci retracement of the “A” to “B” distance.
Now let’s look at my trading chart - a 3 minute timeframe. At “X” you can see that there was no real breakout above Friday’s high (green line.) From there until just after lunch time (first blue arrow) it looked like we might just go sideways for the rest of the day.
But by 10:00 (Pacific time) my moving averages were starting to move downwards, and we were hitting a downtrend line drawn from “X” to “B”. Add to that a pullback to the blue declining moving average, and a short sale with a very close stop is possible. I like close stops, and will often use the blue (13 period) moving average as a trailing exit in case I’m wrong.
Two more pullbacks to the moving average (arrows) could be used for additional short trades, depending upon your trading style. All of them would have been profitable. The question is why I haven’t marked the last pullback (after “C”), which would have been a loser.
Here’s a Fibonacci measurement you won’t see talked about much, and it keeps me out of this kind of bad trade. When we’ve had a strong move, I’ll go back to the first pullback and draw a Fibonacci extension. A strong move will pass the normal reversal points (.0618, 1.0, 1.618, and 2.618) but it’s an unusual move that can get beyond the next level (4.236) without a good correction in the other direction.
Combining this with the 15 minute chart, point “C” is the target for three Fibonacci measurements - a good reason to quit chasing the downside for a while. It looks like a few days off didn’t affect the market’s memory at all.
