After opening with a small gap above yesterday’s high, the market immediately reversed on the first one minute bar and closed the gap (not shown.) That looked like a Spring setup, but there was no confirmation — no Fibonacci level or divergence for the top.
The next two minutes reversed the reversal, and then the market topped out at the 127% Fibonacci external retracement. For those new to the site, that’s a measurement that retraces more than 100% of the previous move, shown on this chart with white arrows early in the morning and again in the afternoon.
Any time the market exceeds a previous pivot you should mark off the 127% and 162% external retracements, since these are the two most likely levels for a quick reversal. If we exceed 162% that’s a good indication that the move will continue for a while.
The turn at the high created another Spring setup as we broke through yesterday’s resistance but immediately reversed. This time the reversal occurred at 127% so there were two reasons to enter a short sale. If you missed that entry, the pullback at “B” was at a 50% retracement of the early decline. I like to enter after Dunnigan blue reversal bars if there is another good reason, since that often acts much like the Spring setup.
An A-B-C pattern (shown in blue) will often turn at 62%, 100%, or 162%. The two bar hesitation at 7:30 was at 62%, but there was no actual bounce. We went through 100% without a pause, and finally made the low of the day at 162%. Nice morning trading.
For the next four hours I can’t find an entry I like. I expect early pullbacks to be 50% or greater, but it never happened. I have a nice parallel trend channel marked in yellow, but without an entry you can’t trade it.
But it does point out the afternoon top, which is also a 162% external retracement and another refusal to move upwards after again breaking yesterday’s high. Not as clear as the morning reversal, but I would still consider it a Spring.
You might take a look at the daily chart before tomorrow’s open. We’re back at the high of a rectangle that has lasted over a month. For longer term traders tomorrow might be decision time.
Dear Lowell
I have a couple of questions.
1. The first is about how far you will let a winning trade reverse against you. In the first spring setup, I think you would have ideally been stopped in at 859.80 during the second red bar. The trade went two points in your favour before retracing 50%.
I realize that you expect first pullbacks to be at least 50% and often greater than 61.8%. In this example 61.8% would have brought the trade to exactly breakeven. Would you have permitted this trade to get back to breakeven or even to a slight loss?
2. If you were entering short near the first blue Dunnigan bar, would your entry have been a stop one tick below the preceding green bar?
Thanks.
Steve,
That’s pretty close. The entries are right. My original stop on the first trade would be at the pivot. However I trade in multiple contracts. On the first pullback at 7:00 I would take half profits on the first green bar at 858.80. Too much potential for a double bottom there. Now because of the one point profit, I can keep my stop above yesterday’s high (above 860) and still have a breakeven trade. Also notice that the volume on that pullback to “B” was declining.
I’d try to stay with this trade (let it go to breakeven) only because I like the moves that result from Springs. In fact on that first trade, if there had been a divergence on a shorter term oscillator (there wasn’t), I would have entered a bar earlier and had even a little more cushion.
Lowell