Trading What I See

After testing the top of the daily rectangle yesterday, we gapped down at the open. This particular type of gap provides useful information whether you trade it or not.

Notice that the center of the gap is precisely 50% of the distance between the top and bottom of that swing. Also that the swing itself is the second pulse downward from yesterday’s top. When you see this pattern, there is a very high probability that the downmove is not complete.

The reason has to do with the internal structure of Elliott third waves, but all you need to know is that the next pullback normally makes a nice short sale. And since that pullback retraced a Fibonacci 38%, ran into resistance at a pivot from yesterday, and stalled at the bottom of the morning gap, there were three reasons for a reversal.

What followed was a nice A-B-C Measured Move for a potential 10 points of profit. If you didn’t get out at the first bottom, the next one had a warning divergence.

And notice once again how previous support or resistance levels (in this case yesterday’s low) are so important as reversal areas. It stopped the first decline (which could also be measured using the gap as a halfway point), and then stopped the rally when price hit it from the opposite direction late in the day, with the second touch forming another divergence.

Fibonacci, Support and Resistance, and trendlines give you the map. Lots of screen time and after-market analysis help you learn to see the setups in real time. Then it’s a matter of taking the trades that make sense to you as they occur. Of course that last part is always the most difficult.