Trading What I See

Once again we got through the first hour without a setup that fit the trading style I show on this blog. Unfortunately, during summer trading that happens much more often than I would like.

It’s not that there are no possible trades on today’s chart. It’s just that when trading in congestion I’ve found that I have many more losing trades that tend to wipe out all the gains from the winners. So I’ve developed several methods to help me define congestion, and learned to live with missing the occasional strong move that sometimes occurs on a breakout.

I define congestion as times when the ranges of a long series of bars overlap that of a single bar. Often I’ll use a longer time frame to watch for this situation. Here’s a post from last year called Overlapping bars equal congestion that shows what I mean.

Back in February in a commentary called Non-Trading Tips I showed a two-day period where, on a fifteen minute chart, almost every bar in the trading day fell inside the range of the first bar. That’s extreme sideways action, and my avoiding trading yesterday and today are just extensions of that method.

Where there is no tradable action in the first hour, unless there is a runaway move, I assume we may be starting a period of congestion. When I mark off that first hour range, I’m just simulating a longer chart on top of my trading chart.

If you’ve followed the earlier links and understand the general concept, take a look at a 45 minute (or hourly) chart from today and you’ll see that EVERY bar today touched the range of the first bar.

You need to decide whether breakeven trading during congestion is worth catching the occasional good move. Personally, I’d rather wait for the stronger setups during intraday trends.

A reader had a question several day’s ago about trading breaks above or below the first hour range. My answer was that if I didn’t already have a trade within the first hour I might not trade at all. Yesterday and today give examples.

Some of the best moves start during the first hour, and I’m always looking for entries. But when I can’t find a setup that I like during this time period, and if the range has been small, I start expecting what happened today — that the first hour range will hold.

Then I confine my search to setups that have two criteria — (1) the setups are very compelling, and (2) if they work they would result in a break outside of this range. It’s surprising how often this will keep me out of positions on a poor trading day.

Yesterday there were no possibilities. Today there was a break through the bottom of the range, but the setup was not strong. For me, both days would allow me to do other research or paperwork.

For those of you that have been following the blog for a while, I’m finally back home (after 2 months.) Everything worked out well, and it’s nice having a multi-monitor setup and time to seriously concentrate on the markets again. Have a great weekend.

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

If you’ve read this commentary for very long you already know I didn’t trade today. If there are no clear trades in the first hour and the range is small, I wait until it looks as though we are breaking out from the early range before trading. No potential breakout — no trade.

But whether trading or not, marking up charts with the potential Fibonacci turning points is good practice. In a narrow range the same patterns still appear, and the more screen time you can put in, the more of the setups you will catch in real time

However, when the market decides not to go anywhere it seems to like reversing at 78% and/or 89%. Maybe those larger pullbacks are just another way of showing a lack of direction.

Notice the nice Fibonacci cluster marked with the yellow “A.” The blue A-B-C turns at the 62% extension just as the smaller red A-B-C does the same. And that happens just as we retrace 89% of the morning drop. Add a nice Stochastic divergence and you have an excellent trade setup. Now all we need is some range.

After nice signals yesterday, the market wouldn’t cooperate today. We continued yesterday’s closing decline, but none of the turning points matched the Fib levels I was watching.

The first pullback didn’t even reach 38%, and the final decline reversed before reaching a 62% A-B-C. By the end of the lunch hour I though we had a reasonable triangle forming (in yellow), but the upside breakout had no volume increase so I didn’t trust it.

The reversal about 10:30 (Pacific time) was the only good Fibonacci turn of the day. It completed an A-B-C at the 62% level which also matched a 38% retracement of the morning drop. But by that time the moving averages were definitely sideways, so I didn’t even consider a trade.

About the only thing today shows is an example of not forcing trades when the signals aren’t there. We have a fairly well-defined rectangle with this afternoon’s sideways action, so perhaps we’ll get a tradable breakout and pullback in the morning.

I don’t think today needs very much comment, but an example of a trading tip appeared during the first few bars this morning. Candlestick extensions above and below the day’s open and close have various names. Some call them wicks, some call them tails.

See how noticeable they are during the early trading. When a number of very long tails appear in both directions on consecutive bars, they are an early indication of market indecision and often lead to false moves or sideways action. When I see them, I am hesitant to trade. And today that served me well.

About the only good thing from a trader’s standpoint is that volatility runs in cycles. Excluding the explosive move after the Fed announcement, the last few days have been very flat. Either we will get some movement soon or I’ve mis-read the calendar and summer is here already.

After gapping up five points we spent the six and three-quarter hours making slightly less than a seven point intraday range. That’s rather tight when you are searching for a trade.

I can point out several divergences today, but they are not ones I would trade. The upper limit of today’s range did stop at a 62% Fibonacci A-B-C, but most of the moves were like Friday — they didn’t quite hit good Fib levels and/or didn’t have anything else going for them.

I’m being more and more cautious, still expecting additional downside action. As for today, there’s really nothing to write about, so I won’t. Back tomorrow.