Trading What I See

We made a nice bottom mid-day, but whether it is just a bounce or an actual reversal remains to be seen. It’s another of those times when I’m glad I can make my decisions as the day unfolds. I’ve left a bit more information than usual on today’s chart, but perhaps it will help explain some shorter term tactics.

The first two bars moved up but ran into trouble as they hit a congestion area from yesterday (X), and it looked like the selloff was going to continue. But notice that the move down from “X” to “A” is actually a small A-B-C pattern. You know by now that this pattern will often stop at 62%, 100%, or 162% of the length of the “A” move. In this case it reversed from a Stochastic oversold condition at 62%.

The move up to the yellow “B” is also a smaller A-B-C, this time ending at 100%. This is also an 89% retracement of the “X” to “A” drop. By the time we start down again, you can draw the upper yellow trendline, and the eventual target is the lower yellow parallel.

I can’t justify any trading through this time period, since it was looking like a consolidation after a trend day. But let’s take a close look at the actual bottom. The yellow “C” is a 127% external retracement of the “A” to “B” move, and it also bounces from the lower parallel. That doesn’t make it a buy.

In a down channel you short at the top, but you don’t automatically buy at the bottom. Because of the geometry of a channel there is much more profit potential trading in the same direction as the trendlines. But when you get a divergence, the situation changes.

The second bottom gave a nice divergence with the Stochastic, we were still at the bottom of the channel, and there was a blue Dunnigan reversal bar. That second bottom is also a 127% external retracement of the last bounce. It’s also a Wyckoff Spring reversal, and I do like that setup.

The move to the high of the day created another A-B-C with “C” being 100% of “A.” That high price is also a 127% external retracement of the morning drop for a nice profit taking spot. If you missed the bottom reversal, the first pullback was a precise 50% retracement with the turn remaining above the longer moving average, so you could have caught the second half of the move.

What’s next? I have no idea. There is conflicting information on the chart. Notice that the blue trendlines converge. That’s called a wedge, although the volume doesn’t contract enough to make me trade it by itself. If the wedge happens to work tomorrow, we could see a quick re-test of today’s bottom. But there is a problem with that scenario.

After the market closed I compared the volume of the downmove marked in yellow with the upmove marked in blue. The number of contracts traded in the move up was four times the number traded in the move down. For the first time in two weeks we have some actual strong volume to the upside.

Short covering? Reversal? It’s a reason I like to day trade. I’ll decide when I see what happens at the opening tomorrow.