Trading What I See

If you’ll remember, over the last few months I’ve been pointing out a daily channel that has been respected by the rally that started last July. If you want a review, I mentioned it here and here and here. Today we broke the channel to the downside.

For my personal daytrading, direction doesn’t make any difference. I actually take a few more short sales than I do long trades. But if you are a swing trader, this may be the start of a long overdue correction. I’ve drawn the Fib levels on this chart to give you an idea of possible targets.

Remember to not take this as any kind of prediction. If the market starts a big rally Monday, I’ll just change my mind. That’s one of the advantages of short term trading.

Yesterday I pointed out the reversal at the top of the blue channel shown on this five minute chart. It also was a Measured Move, and the expectation was for a return to the channel bottom. We had to give up the idea of a bounce by the end of the first bar.

And notice how weak the pullback was from “A” to “B.” The volume on the pullback (not shown) was decreasing, which made an upside reversal doubtful. The strong angle of the moving averages also would encourage a short sale, but only if your entry is high enough to move your stop to breakeven before hitting yesterday’s low.

I have a Fibonacci measurement shown for an exit at point “C” that may take a little explaining. It will also illustrate more of my trading style. I drew the normal Fib extension from the top of yesterday’s channel, but I also drew one from point “X”, which was today’s open. I’m only showing the measurement that worked. And no, that’s not cheating.

During the day I have lines all over my chart, and I erase most of them before posting. Every time we approach one of my lines, I look for confirmation that the line might be “important,” and this one matched a nice divergence in the Stochastic oscillator.

The other lines were ignored by the market so I also ignored them, and eventually they were erased. If I don’t get some type of trigger for a trade, a line on the chart has no real meaning. The divergence gave me a second reason to take action, and if you’ve followed this blog very long you know that’s the type of signal I like.

Now why did I use the opening for one of my measurement points? I know a few traders that never look at yesterday’s data for their calculations, and their trading is still successful. Because of this, I’ll consider any gap opening as an important point, in addition to the ones I normally use. In this case the distance from “B” to the bottom at “C” is a Fibonacci 1.618 times the distance from “X” to “A.”

The second arrow on the chart is another potential entry as price pulled back to the resistance of yesterday’s low. Combine that with an overbought Stochastic and there are two reasons to consider a short. Unfortunately the trade didn’t go anywhere, but it fits my criteria of multiple reasons combined with a very close stop.

What about next week? As usual, I don’t know. But with that daily trendline/channel break my bias will be to the downside for the longer term trend. But as a daytrader, I’ll still take long trades if the signals are there.