Trading What I See

Today is another example of the importance of leaving trendlines on the screen. And, of course, using Fibonacci measurements that include more than just today’s data.

We began with a small pop above the controling trendline from yesterday. Trendlines, when tested several times, work just like any other support or resistance levels — they can be hard to break, but when broken they tend to resist penetration from the other direction.

And, like S&R levels, when price breaks through a trendline, it is supposed to continue - not to reverse. A pullback to the trendline is common, but re-crossing a trendline can be a reversal signal.

In this case price reversed at the resistance of the previous pivot. It is also just over a 127% external retracement (not shown) of yesterday’s final drop. Remember that I consider anywhere between 127% and 162% as a potential reversal zone.

As soon as we went back through the blue trendline it was time to label the chart with the first two letters of a large A-B-C. The three most likely reversal levels for the “C” move are 62%, 100%, and 162%. When you are trying to pick tops or bottoms, it is useful to look for internal measurements — in other words an a-b-c inside a larger move, and that is what we got.

Price looked as though it were going to reverse at the red line I’ve marked Support. That would have made the larger (Red) A-B-C turn at 62%, but that level only held for two bars before continuing downward. By the time we approached the low of the day the labeling was obvious, but in real time it is much more difficult.

If price had turned up from the support line the larger move would have been 62%, and there was a slight bounce there. The next likely turning point was 100%, and again the market tried to stage a rally. This is why I never use the Fibonacci levels themselves for entry. At each potential turning point I watch price closely for indications of an actual turn, using candlesticks, moving averages, divergences, and anything else I observe at the time.

Finally when the smaller A-B-C hit 62% and the larger A-B-C reached 162% we got a Fibonacci Cluster and the market reversed. Another thing I noticed at that level was that we had just duplicated the distance I have marked with Support and Resistance labels. It is not a rectangle, but after spending years working with pattern recognition I sometimes look for targets even when the original “pattern” doesn’t fit the rules.

From the bottom we made another A-B-C to the upside. Notice that the trendline from yesterday reversed the market. The “B” move retraced exactly 50% (forgot to mark it), and the final rise again stopped at 62%. That tends to happen often on sideways days.

On more item that is seldom presented in Technical Analysis books appears at the end of the day. By 10:30 (Pacific time) we had a strongly defined downtrend line (Blue), and then the market started ignoring it. This is usually one of the earliest signs of congestion, and an indication that not trading might be the best choice.