Sometimes the obvious Fibonacci targets don’t work the way you expect. That’s the time to remind yourself that the objective is to make money — not to be correct.
The market opened without much volume and tried to break out above yesterday’s high. To be convincing, breakouts need volume, and without it the reversal wasn’t all that surprising. A breakout that immediately reverses is called a Spring, and I find a tradable example several times a week.
Whenever I see a reversal I anticipate an A-B-C move, so the bounce up from “A” was not a reason to exit. And the turn down from “B” was logical. It was a 50% retracement and occurred at the yellow trendline that was drawn from two earlier peaks. But that’s where things got interesting.
As soon as we turned down from “B” it was time to draw the yellow parallel as a target for the first profit taking level. Since it matched yesterday’s close I expected a turn there. But it wasn’t at a Fibonacci measurement. And there was no Stochastic divergence. Maybe it would be worthwhile to keep part of the position.
When the second hit of the parallel trendline matched the 100% Fib extension I again thought we would bounce, but we didn’t even slow down. Time to draw the next Fib target at 162%. As you can see, we didn’t stop there either.
Now for something you won’t find in many technical analysis books — look at the purple trendline. That is drawn as an exact parallel to the yellow trendlines, but starts at the next pivot I could find. When the market is creating parallel channels and then breaks outside, a surprising number of times price will stop at another parallel to the original channel.
I don’t ever initiate a trade at this point, but in this case you are looking for an exit to retain as much profit as possible. I also found another Fib measurement that pointed to the bottom. The original A-B-C didn’t stop at a good level, but if you will examine the “C” leg it is also a smaller a-b-c. And that purple “C” is the 162% extension of the smaller pattern.
This example is why I always try to trade in multiple contracts. The first half I will exit at a target — the second half with a trailing stop. And when I see a potential reversal, instead of exiting, I just move the trailing stop very close to the price.
After the bottom the market created another nice channel. Unfortunately I can’t see any good entries. But finally at 11:30 we made another reversal with three indications that it might happen. We had retraced 62% of the morning’s drop, we were hitting the top of a well-defined channel, and also running into resistance from a previous pivot.
Another A-B-C that was a Measured Move, and also matched a 62% retracement of the rally, created the last pivot bottom of the day. More lines than usual, but this is what my charts often look like before I clean them up as posts to the blog.
