Trading What I See

Evidently the 127% external retracement was the correct turning point from yesterday’s close. But remember, there were too many other potential reversal levels. If that had happened intraday it was only a trade to consider with extreme caution.

After a gap and a 50% retracement, the market completed a small A-B-C (red) for a Measured Move. The next three hours created a sideways pattern that eventually turned into a rectangle. Although it takes four touches (two on each side) to confirm a rectangle, each touch of the top was on less volume. That’s a strong hint that a consolidation pattern is forming, and a rectangle was a likely possibility starting just after 9:30 (Pacific time.)

Rectangles can go on for a long time, but remember the importance of forgotten trendlines or trendlines drawn from the first small pullback. At the second bottom marked “B” price bounces from that trendline and then makes a volume breakout from the rectangle. The market didn’t even slow down at the rectangle target (width of the pattern), but went to the 100% Measured Move of the larger formation to make the high of the day.

There were three close targets for the high — the yellow parallel (not quite hit), yesterday’s high (green line) and the C=100% blue target. Unlike yesterday’s close, two of the three were exact hits, and the third was close. Certainly a point for partial profits if not a complete exit.

Take a look at the earliest pivot marked “B.” That was certainly a potential entry, and although it’s hard to call it a successful trade, it shouldn’t have been a loser. I’m often an impatient trader, and my exit would have been during the sideways action in the center of the rectangle.

If you had more patience, the false break to a new high should have been an exit. Compare that action to the Spring pattern that often appears on my charts. A break to a new high for any move must have a volume increase to be trustworthy. Any reversal after a low volume breakout should be considered as a potential exit signal.

I’ll be on the road all day tomorrow, so there is the possibility I won’t manage a post in the evening. If not, I should be back on Friday. Good Trading.
Lowell