Still Sideways, But Improving
Today was almost an inside day, if you’re willing to ignore those two pokes to the downside during the lunch hour. We still don’t have any range to work with, but at least the Fibonacci retracements and clear divergences are giving signals.
When we continued up this morning I was looking at two potential turning points — yesterday’s high or a 127% retracement of yesterday’s last drop. By themselves, I wouldn’t have traded either of these setups, but when I see a good divergence at one of these pre-defined levels I’m immediately looking for an entry where I can use a close protective stop.
The move down from 7:00 to 9:00 followed the pattern I like to trade — 62% for the first pullback, followed by 38% for the second. The final bottom stopped close to a logical level; another 127% retracement — and again it turned with a divergence.
Today illustrates another piece of the trading puzzle where I have drawn the yellow “X.” This bottom is a perfect 62% retracement of the earlier rally. Why isn’t it a signal for a long trade?
A guideline that helps keep me out of trouble is that I will seldom take the first trade that goes against a divergence. There was a good top divergence, so I expect the rally from “X” to fail. I’m still looking for downside action. What if the market had gone up? It would have gone without me. I’m not trying to take every possible trade — just the ones matching my expectations and trading plan.
After the bottom, we had exactly the same pattern in reverse. The first pullback was 62%, followed by a second pullback of 38%. Notice also that the second pullback took more time to cover a smaller percentage retracement. That again is typical of the kind of moves I attempt to trade.
