Trading What I See

After two days of intraday sideways movement, it looked like we were going somewhere this morning. At least for a while. The first pullback was a nice 50% Fibonacci retracement, and it had a different character from what has happened recently.

For the last two days the only setups I could find were either inside congestion or preparing to move back into the congestion area. If the pullback this morning worked out, it would be breaking into recent high ground. That makes it worth considering.

The yellow “X” on the chart is from yesterday, where I pointed out a Fibonacci cluster of three different measurements. I wouldn’t trade it because of the location, but since this was a pullback from that move, it became even more attractive.

I’ve marked yesterday’s action as a rectangle — rather sloppy, but the pattern is there. That makes this morning’s first few bars not only a 50% Fib pullback, but a pullback to a support area.

Rectangles have a relatively simple first target. They will usually move at least the width of the rectangle after the breakout. Often there will be false moves during the pattern, which is why I wait for a pullback which seems to happen more than half the time.

But after that move there was a problem. Look at the Stochastic divergences. There was no type of confirmation for a trade in the opposite direction, but certainly a warning to take your profits. If you look at a 15 minute chart (not shown) you’ll also find that this morning’s top was a Measured Move (100% move in an A-B-C pattern) from Monday’s low. Another warning that should have been marked on your charts.

If you are not familiar with finding and trading patterns, my favorite guide is listed below.

Edwards and Magee: Technical Analysis of Stock Trends