Trendlines and Patterns
The charts may look a little different (haven’t rebuilt my templates yet), but the same old trendlines and A-B-C patterns keep giving trading signals.
As happens so frequently we made a small gap in one direction and quickly reversed. The question was “How far will we go?” I’m always looking for a potential reversal at a 127% external retracement of the last move, and if we pass that, I watch carefully at the 162% retracement. That’s where we put in the top for the day.
If we get above the 162% retracement I assume the trend has reversed, but today was just a sidways movement. From the peak the market set up a down-channel, and if you were really comfortable with trendlines you could have caught it quite early. Notice the first two trendline touches on the line I have marked “Parallel.” If you drew in a trendline using those bottoms, you could have drawn the top red line. If you didn’t, we still retraced right to the 62% Fibonacci level at the Black point “B.”
Everyone should have then drawn the top Red trendline, which gave a nice target for the second move down.
This move down (to point “C”) was a Measured Move — a distance equal to the first drop. There is also a small a-b-c (not marked) within that last move, and in that case “c” equals 62% of “a.” That makes the bottom marked with a Red “A” a Fibonacci cluster — 100% of “A” on the larger move and 62% of “a” on the smaller one. Add a divergence in the Stochastic and those are the type of signals that are most likely to be correct. In this case I would only consider it as an exit, but these multiple signals will often give good entries.
The pullback to the large Red “B” was again a 62% retracement of the entire downmove. It would have been nicer to see a Stochastic divergence there, but the market never makes it that easy. The following drop was the fastest move of the day, but it still stopped at an exact Fibonnaci 100% level for the second Measured Move of the day. The move to the Red “C” was an exact match for the move to the Red “A.”
The afternoon push upwards was stopped at the Blue trendline (you did draw that after the pivot at Red “B” was created — right?) The trick to this kind of trading is to draw all the trendlines and all the Fibonacci levels and then carefully observe how price reacts when those points are reached. And then to go back after the market has closed to find all the levels you missed in real time. The longer you do this, the fewer setups you’ll miss. Fortunately you don’t have to catch them all to keep ahead of the game.
