Trading What I See

The market often will reverse direction when it gets new information. What continues to amaze me is how often those reversals occur right at chart points that correspond to support and resistance, trendlines, Fibonacci, or High-Low-Close levels. Today I’ve turned off volume and moving averages because I’ve left so many lines on the chart.

We had a slow start this morning as traders waited for the New Home Sales report. When the report was released, the market had just reached a 127% external retracement of Friday’s last decline. Any time you exceed a previous peak its important to have this 127% level marked, since this will often be the turning point.

These 127% levels often appear as a Spring formation where price breaks to a new high or low and is unable to continue. When this occurs along with a Stochastic divergence you have multiple indications of a potential trade. Then it just depends upon your entry technique. If you get a trigger, you have a trade.

When the numbers were worse than expected, the market dropped down to the day’s low where it created exactly the same pattern in the opposite direction. There was a low, a pullback, and 127% external retracement of the bounce. Again there was a good Stochastic divergence with price.

A high percentage of market movements occur in three pulses and I often mark them as A-B-C. The first move off the low stalled at the resistance of the previous pivot (A), retraced 38% (B), and then completed a Measured Move to point “C” which is the same length as “A.”

Before we got there I had drawn the blue trendline from the bottom to point “B” and the parallel trendline extending from point “A.” In addition to hitting the parallel trendline, there is the resistance of yesterday’s low (red line.) There was also another Stochastic divergence, making four reasons to look for another reversal.

The question was whether to exit or actually reverse to a short sale. Personally I thought we were going further down. But whether in a trade or just waiting for an entry I keep drawing my trendlines and Fib projections while watching for signals.

We broke the blue trendline, but stopped at the 50% retracement from the bottom. That was a logical place for a bounce, but there was no evidence of an actual reversal. As soon as the blue trendline broke, I drew in the yellow top trendline and its parallel. That’s where the market reversed again — yellow parallel, 2nd touch of the 50% retracement with a double bottom, and another Stochastic divergence.

That was enough to eliminate my downward bias, but certainly not enough to expect much higher prices. So although I didn’t trade after lunch hour, notice that the top reversal came at a parallel trendline combined with hitting yesterday’s close and a 78% retracement of the morning drop. Lots of signals today. How many you were able to take depends on your trading style.