Trading What I See

For those having trouble accessing the site yesterday, evidently the server holding Trading What I See was having high load issues. It took me several hours to post yesterday’s comments. When I checked, the web host was working on the problem. My access seems much faster today, so perhaps it is solved.
Lowell

Today the Russell 2000 had the fifth narrowest range so far this year — 5.9 points. And that range occurred right at the top of the daily rectangle. Actually this could be good news.

When price makes a continuous move from deep inside a pattern and then immediately breaks out, the odds favor a failure. Too much of the rally strength has been expended inside the pattern. However when there is a pause near a pattern’s edge, then a high-volume breakout is much more likely to succeed. But right now I’m waiting to actually see that breakout before I get excited on the upside.

Not much else to say on today’s action. We turned up at a Measured Move (C=100%) and developed a triangle formation. However the breakout had no volume behind it, and price reversed just above yesterday’s high before coming anywhere close to the triangle target. Not surprising with the lack of volume.

Another indication of the slow trading. The NYSE Tick ($Tick) never hit either a plus or minus 1000 today. I only watch the Tick at critical points, but most days one direction or the other will have some bias. And I would expect to see a high reading there when we finally break from this consolidation pattern. Maybe Monday.

Today was an up day with minimal pullbacks, but it certainly looks like more consolidation on a longer term chart. Starting with a 45 minute time frame (today is only the last nine bars) we stalled at a downtrend line just as we reached a possible “C” top at 62% of the “A” move.

That’s the normal turning point for a weak move, and notice the declining volume. Of course a breakout tomorrow morning would change this pattern, but it will be a shortened trading day followed by the holiday on Wednesday.

I have a tendency to distrust the setups around a holiday, but usually when I look back at them later they will often work just as well as during normal trading periods.

On the trading chart (3 minutes) there was a pullback after the gap opening, followed by an up to sideways day — profitable if you could figure out a safe entry. I don’t really see one unless you took the break above the first bar’s high. The external retracement of the lunchtime pullback turned at 162%, just as we hit the downtrend line on the longer chart.

Unless something surprising happens tomorrow I probably won’t post a commentary.

For the third day in a row the first hour range has contained the market’s overall movement. In each case, lacking a good setup during this period I can find no compelling reason for taking a trade.

As you can see from the chart, the Fibonacci measurements are still working even if the market is not going anywhere. There were two A-B-C patterns, each turning at 62%, showing a lack of conviction in either direction.

Sometimes, during periods of indecision, the market will make an early move and then spend the rest of the day oscillating around the center point of that range (blue arrow.) As happened today, that’s where the market will often close.

Boring trading, but remember — when the market puts enough traders to sleep it can suddenly wake them up with a surprise move.

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.

Yesterday’s reversal continued this morning with a gap down. The first thirty minutes gave no pullback entry, and at the end of the first hour the range was well under six points.

Whenever I have no entries that I like during the first hour, I normally wait for a break of that range before making a trade. Today that didn’t happen until lunch hour, and by that time I saw no indication of a trend. So although there were some possible small trades, I wouldn’t have taken any of them.

The morning drop turned right at the 50% retracement of the rally from May 1st, and spent the rest of the day filling the morning gap. The first pullback to the slow rally was only 38%, and I will usually not take a trade on that first retracement unless it is at least 50%. Are you getting the idea that I don’t like the present trading environment?

The A-B-C move met resistance at 162%, and bounced along a rising trendline until the close. That last little fakeout/breakout just managed to close the gap, and if this had happened early in the day I would have traded the reversal as a Spring.

If you look at a daily chart we have been going sideways for 17 trading days. Just remember, the market can keep doing nothing until it wears you out. Then it will make a sudden move. Let’s just hope it happens before the summer doldrums set in.

Made a quick trip home and, among other things, brought back copies of my black templates for the blog. Now all I miss is my multi-monitor setup and being able to trade during the day. Just a quick look this evening, but the market is still keeping time in a Fibonacci rhythm.

We popped through yesterday’s high and reversed right at the 162% external retracement of yesterday’s initial move down (best seen on a 15 minute chart.) Remember that most failures that form reversals seem to come at or between 127% and 162% of the previous decline. Once we get beyond the 162% level, the move usually continues.

I prefer reversals at the closer 127% Fib level, but stay cautious until we pass 162%, and today we didn’t continue. The move back down through yesterday’s high created a failed Test of Top, and we pulled back 50% of the up move. After that failure I would pass the pullback, but would probable have made my first trade at the 62% retracement at 8:30 (Pacific time) with a short sale.

Several reasons for a short at that point: first the 62% pullback goes right to yesterday’s high — a normal resistance point. Second, look at the lack of speed in the rally. If you compare the speed of the morning drop with the slow retracement, a loss of momentum is obvious. A shorter term oscillator also shows a divergence there — another indication of poor momentum.

Of course today’s lack of range means that you need almost perfect timing to make any money. Each of the declines reversed at the 127% external retracement, with a smaller range for each move. Not exactly a good trading environment.

I still think this is a longer timeframe top (see previous post) until we exceed the 839.60 high we made on April 26th. But once again, that is only a working thesis, and makes little difference to a daytrader.

Today is another example of the importance of leaving trendlines on the screen. And, of course, using Fibonacci measurements that include more than just today’s data.

We began with a small pop above the controling trendline from yesterday. Trendlines, when tested several times, work just like any other support or resistance levels — they can be hard to break, but when broken they tend to resist penetration from the other direction.

And, like S&R levels, when price breaks through a trendline, it is supposed to continue - not to reverse. A pullback to the trendline is common, but re-crossing a trendline can be a reversal signal.

In this case price reversed at the resistance of the previous pivot. It is also just over a 127% external retracement (not shown) of yesterday’s final drop. Remember that I consider anywhere between 127% and 162% as a potential reversal zone.

As soon as we went back through the blue trendline it was time to label the chart with the first two letters of a large A-B-C. The three most likely reversal levels for the “C” move are 62%, 100%, and 162%. When you are trying to pick tops or bottoms, it is useful to look for internal measurements — in other words an a-b-c inside a larger move, and that is what we got.

Price looked as though it were going to reverse at the red line I’ve marked Support. That would have made the larger (Red) A-B-C turn at 62%, but that level only held for two bars before continuing downward. By the time we approached the low of the day the labeling was obvious, but in real time it is much more difficult.

If price had turned up from the support line the larger move would have been 62%, and there was a slight bounce there. The next likely turning point was 100%, and again the market tried to stage a rally. This is why I never use the Fibonacci levels themselves for entry. At each potential turning point I watch price closely for indications of an actual turn, using candlesticks, moving averages, divergences, and anything else I observe at the time.

Finally when the smaller A-B-C hit 62% and the larger A-B-C reached 162% we got a Fibonacci Cluster and the market reversed. Another thing I noticed at that level was that we had just duplicated the distance I have marked with Support and Resistance labels. It is not a rectangle, but after spending years working with pattern recognition I sometimes look for targets even when the original “pattern” doesn’t fit the rules.

From the bottom we made another A-B-C to the upside. Notice that the trendline from yesterday reversed the market. The “B” move retraced exactly 50% (forgot to mark it), and the final rise again stopped at 62%. That tends to happen often on sideways days.

On more item that is seldom presented in Technical Analysis books appears at the end of the day. By 10:30 (Pacific time) we had a strongly defined downtrend line (Blue), and then the market started ignoring it. This is usually one of the earliest signs of congestion, and an indication that not trading might be the best choice.