Trading What I See

We started the morning with a re-test of Wednesday’s low where the market put in what looked like a tradable divergence. It was a 50% pullback from yesterday’s rally, and when there was a double bottom it had the potential for a good trade higher.

But potential and reality don’t always match. Something to remember about divergence trades — they work best when there has been a relatively fast move to reverse, and they usually don’t include much sideways action. When we couldn’t move above the early high price it was time to make sure a trailing stop didn’t let the small profit turn into a loss.

I have an A-B-C marked in blue that could have been drawn using other pivots, and actually had both marked on my trading chart. The one shown has “C” being a 162% extension, while the other possibility measured approximately 62%. Either said potential reversal. The top was precisely at the earlier morning high, and had another divergence. Notice that it also reversed at the upper blue trendline.

That was at least an exit of the earlier trade, and some may have used it for a short sale. I was watching the blue channel shown, and when we slipped below it there were four bars to decide if you wanted an entry before the decline during lunch.

The market made three attempts at a bottom before the green letter “C”, but by that time you should have had the measurements for the large A-B-C on your chart. The 62% measure wasn’t an issue, since the market didn’t even try to bounce there. We finally made a bottom at exactly the 100% Measured Move.

The day ended with another A-B-C pullback, but this time it had at least two things against it. First there was no divergence, even on a shorter oscillator. And second it was Friday afternoon. As a daytrader, my weekend usually starts about an hour before the market closes.