Trading What I See

I’m sure you’ve noticed that I sometimes “cheat” when talking about patterns and trendlines. Most of the rules you find in Technical Analysis books are designed to keep you out of trouble. Rules like not drawing trendlines through price data. And if you follow these rules you will have fairly successful results.

But remember that these “rules” are designed to simplify explaining the market to readers. What I’ve found is that even when the rules are not completely met, the ending result may be the same. A few days ago I pointed this out with a rectangle. Today I’m going to do it with a trend channel. I’ll call this a “What If” channel.

What if the Chinese market hadn’t made a sudden drop before the market opened yesterday? As you can see on a 15 minute chart, the market had already created an upchannel and then gapped outside the established trend. What if the market pulling back inside the channel meant it was going to ignore this event? What if you extended the trendlines and watched them today? What if you caught the top this morning?

I spend most days drawing trendlines, checking Fibonacci measurements, and asking What If? Sometimes the market gives me interesting answers.

After the gap and run to the top of the 15 minute channel, the market moved sideways to down until it hit the bottom trendline. On the 3 minute chart the pattern was an A-B-C Measured Move, with the bottom also occurring at a 127% Fibonacci external retracement. Add the yellow parallel trendline and the fact it was also at the level of yesterday’s close and there were lots of reasons to anticipate a turn. But probably not enough range to encourage an entry.

But looking back at the 15 minute chart, What If today was a bull flag? Or on a 45 minute chart What If we just created a Test of Top from May 23rd? Two questions that point in different directions. Guess we’ll just have to wait for tomorrow and see what setups develop.

Edwards and Magee: Technical Analysis of Stock Trends