Yesterday closed with a Test of Top in the Russell 2000, and today opened with a failure of that test. Nothing serious — just another inside day, but when a market makes new highs and can’t continue there is a serious threat we may head in the opposite direction.
The first chart today is the 15 minute timeframe, and it shows a large rectangle formation. This gives a good picture of how much congestion there has been in this shortened trading week. Criss-crossing moving averages are another good indication that trading opportunities will be hard to find.
With no reasonable trade setups today, lets review two types of retracement patterns that, under better conditions, I watch for potential entries. The first, marked in yellow, is a normal Fibonacci retracement. This is the one most people recognize, where the market pulls back to give traders a second chance at entering a change of trend. It is often 62% of the original move, but other Fib numbers will occur.
The retracement marked in magenta is less well known. It has several names, but I like to call it an external retracement. This is a retracement that goes farther than the original move, and will often reverse direction at 127% of the first move.
Neither of these are automatic trades, but since they can be drawn long before price reaches them, they give lots of time to look for confirming signals. The two levels also work well together, since a purchase at the 62% level can often use the 127% level as a first target.
You can see how that would have played out today — if we hadn’t been in congestion. If someone is new to Fibonacci measurement, these are the two levels I would have them watch first.
