Once again it’s necessary to use part of the previous day’s price data to show all the Fibonacci relationships, so this is a five minute chart rather than my trading time frame. Today starts at the beginning of the blue dotted line (yesterday’s close) in the middle of the chart.
The narrow yellow channel was already in place, and yesterday we closed right at the lower trendline. This was also a 50% Fibonacci pullback of the previous rally. On my 3-minute trading chart the Stochastic was oversold, so an entry would only risk a break below the rising trendline.
The upper line of the narrow channel didn’t stop the early price surge. When this happens,I usually draw another parallel line from an earlier peak. These secondary channel lines are not quite as consistent, but you can see they certainly worked today. When we approach the top of a channel, I move my trailing stop quite close, so I didn’t catch the last part of the move.
Then came a series of divergences — first at point “3″, and then at what I have marked as “B.” Point “3″ is the type of divergence that I use for exits, but not to take a position in the opposite direction. Notice that each minor peak is higher than the last, and so are the pivot lows. Higher highs and higher lows still indicate an uptrend. I’ll only take a reversal here if the divergence looks very strong.
But by the time we get to point “B” things have changed. Point “A” was a lower low, so the trend is now sideways. Point “B” becomes a test of the top at point “3″, and since “B” is slightly higher than “3″ it could be considered a Spring top. This divergence creates a short sale setup, with the trigger being the break of the blue trendline and the moving averages.
If you look at the entire move that started Friday, you’ll see on a larger scale the patterns I’ve been pointing out lately. The first pullback (#2) is a 62% Fibonacci retracement, and the second pullback (#4) stops at 32%, in this case of the entire move from Friday’s bottom. A large first pullback followed by a smaller second pullback are the norm. After this happens, additional entries become much more risky.
