Trading What I See

There are several types of trend day, some easier to trade than others. Let’s start with the overall picture (15 minute chart), and then look for potential entries on the trading chart.

After the gap opening the market pushed right through the 162% level of a larger A-B-C. Whether measuring external retracements of the first pullback or the “C” leg of an A-B-C, passing the 162% level is where I stop looking for a reversal setup.

The next stop is often the 262% Fibonacci level, and that’s where we reversed at the end of the day. We’re back at the top of the daily rectangle, where we reversed four days ago. Was this a Spring reversal? We exceeded the top price from the rectangle by one tick.

I would be cautious of a gap up tomorrow that quickly reversed, but a continuation of the closing pullback followed by an upside breakout with volume could head for the rectangle target over 30 points higher.

Did I just say we could go either way? Don’t I always? Let’s see what happens in the morning.

Now, how could you have caught this move? First remember the quote from Victor Sperandeo that I’ve used often.

If there is a gap, and it is going to reverse, it will do so 10 to 15 minutes after the opening 95 percent of the time.

By the first pullback this morning we had exceeded a potential 162% A-B-C which means you should expect continuation. We had also exceeded Trader Vic’s 15 minutes without a reversal. Two reasons to look for upside action, so what we needed was a usable entry.

For entries in a trend I usually look for a bounce off the bottom of a parallel trend channel, or a pullback to a Fibonacci level measured from a major pivot. It didn’t take very long to realize that neither of these two methods would work this morning. So instead, I used the opening price to start my measurements.

From “A” to “B” was a 62% retracement, but the next three hours progressed so slowly it made the trade seem like a mistake. Without any good basing points my procedure is to gradually move my stop up with each new pivot (yellow lines), with an exit shortly after “C=100%.”

After that slow 5+ point rally, I was surprised by the afternoon move and didn’t even consider an entry. But at least we are out of the sideways action of the last two days. Tomorrow we’ll see what happens with the rectangle.

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.

The market made an immediate reversal just after today’s opening, and declined for the next 30 minutes to the eventual low. Without any pauses there wasn’t much chance for a safe entry. And without any pullbacks there were no internal measurements to pinpoint the bottom.

So even though we turned at a 78% Fibonacci retracement level, by the end of the first hour I had found no tradable setups. That’s when I drew the magenta bars to mark off the first hour’s high and low, and although we broke out of that range there were still no clear entries.

Finally at the pivot marked with a circled “4″ there was a potential entry. As I said yesterday

where there are two pullbacks in a move, the first one will usually be large (most often 62%) and the second one small (38%.)

Of course the movement over the next hour was just sideways so I gave up on the trade. I should have remembered that we are now into the summer trading season where many of the moves seem to happen in slow motion.

During this season it’s often useful to pay more attention to (but not necessarily trade from) the longer term charts because many of the patterns are extended. Even a move from a three to a five minute chart can clarify moves, since you can include more of the previous day’s trading.

By including part of yesterday’s move on this five minute chart you can see the structure of an Elliott impulse wave. If you realize that Wave Four is often a long drawn-out affair, it might increase your patience in this type of a trade. Remember that I don’t actually trade Elliott Waves as such, but much of what I present on this site is derived from Elliott principles.

There’s another reason to illustrate an Elliott Wave today. Last night I received an e-mail from Elliott Wave International. When they found some of my Elliott comments on Trading What I See during a Google search, they asked me to become one of their associates.

Doing so allows me to put up some links (left sidebar) to free information they offer on their site, such as a very nice 10 lesson Elliott Wave tutorial. For those of you interested in Fibonacci and market structure I highly recommend it.

If you follow any of those links, you’ll have to sign up for Club EWI which puts you on their mailing list. Fortunately they don’t send out material excessively. But it’s a no-cost way to learn more about how the market works (at least some of the time.)

Last Tuesday’s commentary left price just under a downtrend line (shown today in yellow) on the 45 minute chart. Since that level had also completed a potential A-B-C with “C” pausing at 62% of “A”, it was looking much like a top.

After pointing that out, my next sentence was “Of course a breakout tomorrow morning would change this pattern …” The magic of Fibonacci and trendlines is how often they work, not that they can predict the market. Part of successful trading is the ability to quickly adapt to new information. On the shortened trading day Wednesday price pushed through both the trendline and the Fib level. But look what happened next.

As soon as price exceeds a pivot point, you want to draw an external retracement measurement to show the 127% and 162% Fib levels. That’s where to start looking for the next potential reversal. And that’s where we closed on the three bars that eSignal shows occurring on the 4th. That doesn’t predict the downturn this morning — it just means it shouldn’t have come as a surprise.

As I have said many times, where there are two pullbacks in a move, the first one will usually be large (most often 62%) and the second one small (38%.) Today the second pullback turned right at the 38% Fibonacci level AND bounced off the support of the broken trendline. An obvious place for a turn.

On my three minute trading chart you can see the market made a nice A-B-C=100% Measured Move that hit the bottom of a parallel channel (in yellow). That gives today’s low two measurements from a 45 minute chart combined with two more from the trading chart. When multiple time frames agree on direction, you have a high probability trade.

Of course there are often more potential Fib and channel trades than I point out (or sometimes even see) that are available during the trading day. In Tuesday’s comments John explains how he used the $Tick reading combined with the magenta channel this morning to execute a nice short sale starting at “X” on the chart. Nice trade, John.

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.

After a narrow range yesterday, the market made two tests of the top before turning down over the lunch hour. There was declining volume on the second test, but at that time it looked like the entire day would just move sideways.

As usual, when there is no setup during the first hour I’ll mark off the top and bottom of the range and wait for a breakout (magenta lines.) Of course when we broke down there was the obvious support of yesterday’s close and yesterday’s low, so I didn’t see that as a setup.

During the day there were three pullbacks, and each showed declining volume (all marked with yellow.) The earliest was inside the first hour’s range and didn’t threaten to break out. However the second was outside that range, and the low volume pullback turned at the 50% retracement level. That’s a potential setup with a short sale just after the yellow trendline break at the blue “B.”

Again there was a low volume pullback after yesterday’s pivot bottom was broken for another potential entry (yellow “B”.) I like the second entry much better, since by this time the moving averages are pointing down.

The eventual bottom came on a spike through the yellow A-B-C and turned at both the blue parallel and at the larger A-B-C where the “C” move equaled 162% of the “A” move. Not a great trading day, but still a good example of how declining volume on pullbacks is usually followed by continued moves in the trend direction.

Wedges usually appear during the final surge of a larger move, as a last gasp rally or decline before a reversal. Yesterday’s WEDGE was an exception, since it was pointing against the recent downtrend.

But all the identifying features were there. It made three touches of the bottom trendline and two of the top, creating converging lines. Each of the internal moves can be seen as a small A-B-C. The second major pullback doesn’t find support at the peak of the first wave (overlapping moves.) And volume declines throughout the pattern.

We broke out of the wedge at the open, had a pullback to the rising trendline for a potential entry, and made a relatively fast move to the wedge’s initial target — the very beginning of the pattern.

A wedge will usually reach target in half to three-quarters of the time it took to form. Normally that won’t be the end of the move, but there was a nice divergence (double bottom) warning that at least a strong bounce might occur over the lunch hour.

Like a triangle, a wedge will often reach its target (and sometimes reverse) at the same time the pattern lines cross. That’s certainly a place to take at least partial profits.

The afternoon trading was just a sideways move, perhaps caused by traders unsure of what would happen during the aftermarket rebalancing of the Russell 2000. That’s what caused the spike just after the market closed. It’s interesting that it went just high enough to complete an A-B-C=100% close to the week. Maybe there’s something to this Fibonacci stuff after all.