Trading What I See

Today I was tempted to take at least one trade, but decided against it. Let’s look at some longer term charts and I’ll show you why. First the Daily.

I last showed a Daily chart when we broke out of a four month up-channel. Since that time we have been traveling sideways in what looks like a rectangle. We’ve had some new highs in various indexes, but not in the Russell. If I were trading the daily chart I’d probably be on vacation. One tip worth remembering — according to Linda Raschke, the longer a consolidation takes, the more likely it is to be a reversal.

On a 45-minute chart you can see why I didn’t get excited when we broke down this morning. After a slight gap up to the longer moving average (white,) by 7:00 AM we had dropped and bounced off a rising trendline. Notice that the moving averages are crossing back and forth, showing that this time frame is also in congestion. Add that down trendline and it sure looks like a triangle to me.

Finally to the 3-minute trading chart. If you’ll remember yesterday I called the small gap up and the reversal as a tradable setup when it crossed the moving averages. I hope you don’t consider this a similar situation. Yesterday we poked through resistance — a requirement for a Spring. Not today. Yesterday we were hitting Fibonacci resistance. Not today. Yesterday there was a divergence. No trade for me here. It would have made money, but it doesn’t fit my trading plan.

As you saw on the 45-minute chart, we bounced where it was expected, and this placed us back in some tangled moving averages. Congestion is now showing on three time frames. And as I’ve mentioned several times in the past, when I can’t find a tradable move in the first hour I will tend to wait for a breakout from this range. In this case the range was set in the first 30 minutes of the day.

Over the next three hours we formed a rectangle, and my only temptation was to take this breakout trade at the end of the day. If you don’t normally trade chart patterns, here are my requirements for a rectangle trade. First the volume must decline, with the only exceptions being false pokes through the boundaries. Second, the actual breakout must have a nice increase in volume. And third (many don’t agree with me on this one,) I want a pullback to the top of the rectangle for my entry.

All of these happened today, and we quickly reached the first target in about 20 minutes. But it was Friday. And we are in congestion. And a lot of traders had already left for the weekend.

If you want to learn more about chart pattern trades, I still think the best book available is Edwards and Magee’s Technical Analysis of Stock Trends (see my review.) It’s also the most-used book in my trading library.

Edwards and Magee’s Technical Analysis of Stock Trends