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

Yesterday I didn’t mark an A-B-C for the downside triangle and its target because the previous day’s low seemed to form a strong support. So today the market started out by breaking that support and reversing right at a Fibonacci 162% extension for the A-B-C, and then gave a nice Spring setup.

The magenta “B” is a Fibonacci 78% retracement (not marked). Notice how it stalls at the level of the yellow “B” from yesterday. A nice combination of both price and Fibonacci resistance.

We ended the day at a Fibonacci cluster from two time frames. The larger magenta A-B-C is a 100% extension, while the smaller yellow A-B-C is a 162% extension. In addition, that level is the target for two external Fibonacci retracements. It is a 262% retracement of this morning’s move to magenta “B”, and a 127% external retracement of the second rally to yellow “X.”

Just because we have a nice Fibonacci cluster here, don’t assume this is the bottom. We are still inside a Daily rectangle, and have a way to go before testing the bottom support.

Even better, don’t assume anything. Look for setups that make sense to you and let the market gurus make their predictions. Taking good looking setups in either direction is what makes money in the market.

Yesterday you saw how having two days of data available pointed out some pivots. Exactly the same thing happened today. And our good friend the 127% external Fibonacci retracement showed up again.

For those that just found this site, an external retracement is when a pullback extends beyond the starting pivot. Most people know about the 38%, 50%, and 62% pullbacks, but when price actually moves beyond the starting point, Fibonacci reversals still keep appearing. The first turning point past 100% is 127%.

The opening price gapped above yesterday’s resistance, and on the second three-minute bar we reached the 127% level. And when we shot back down through the resistance line it created a Spring reversal.

As will often happen we had a pullback to that same line. That would have made a much safer entry for a short sale by allowing a closer initial stop. The next reversal was at the trendline from yesterday’s data which was hit just as we retraced a Fibonacci 89%.

Many of you know I don’t like to trade between converging trendlines, but not everyone has that bias. In this case the bottom entry would have made a nice trade as it moved to the upper converging trendline just as it made another 127% external retracement. I can’t justify calling this a WEDGE pattern, since the volume doesn’t fit, so I guess it’s just wait for tomorrow.

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.

Single Fibonacci levels often mark turns in the market, but it’s always more reassuring to have multiple reasons to consider a trade. If several Fib measurements line up at nearly the same price it’s called a Fibonacci Cluster.

Today started with a gap below yesterday’s range, with an immediate pullback to yesterday’s low where it met resistance. This was also a 38% Fibonacci retracement of the move from the previous close. Notice that the volume decreased on the pullback. An entry could either be a short-term trendline break, or the break of the faster moving average.

Then there was a quick drop into a Fibonacci cluster. When you are trading clusters you don’t know whether price is ignoring them until the farthest level is broken. This means that if you enter at the highest level, your stop should really be placed under the final Fib point. This is why I want a Fibonacci cluster to have the levels very close together.

In this case there were three Fibonacci measurements. I’ve placed the three arrows showing where they fall. The highest level was a Measured Move, where “C” was equal to “A.” Next came the 262% external retracement of the A-B move, and the actual turn was at a 38% retracement of the rally from the March 14th bottom. The three levels were within 1 1/2 points of each other.

But in this case the Fib range wasn’t an issue — there was no reversal green bar until after the bottom Fib. That was my preferred entry. The Stochastic divergence gave some additional support to the trade.

The move up made another A-B-C Measured Move, and again the Stochastic diverged from price. The yellow “C” is actually another Fibonacci cluster. I’ve left off two of the measurements to make the chart easier to read. It is an exact 78% pullback of the original drop, and there is a smaller Measured Move inside the “B” leg. The up-down-up action of “B” is another perfect a-b-c.

The market must have been making up for the lack of signals yesterday, because it finished with a third A-B-C, and once again there was more than one measurement to show the turn. It was a 62% retracement of the mid-day rally, and the A-B-C stopped at 162%. The only minor flaw in the pattern was that Stochastics waited for a second bottom before giving the divergence.

For some reason my data provider (eSignal) always includes several hours of holiday trading in their feed, and although I can screen it out in the S&P Futures, it still shows up in the Russell 2000. If you can ignore the “extra” bars on the chart, this morning’s bounce came at a logical Fibonacci level.

Without the extra data the trendline (from the 15 minute chart) would hit at a slightly different level, and perhaps there would have been a divergence in the Stochastic — there was in the shorter Stochastic I was watching at the time.

We opened with a small gap and a 15 minute drop (A), made a three bar pullback (B), and bottomed (C) with a slight penetration of a trendline that started from the February 12 low. The bottom was a precise 78% retracement of the rise from the low on Friday.

Whenever I have and A-B-C move (down-up-down) I take the distance from X to A and multiply it by Fibonacci ratios to get 62%, 100%, and 162%. These numbers are subtracted from the pullback (B) to give potential turning points for the move.

If the move is strong it will carry to 162% or further. If it is an average move, it will stop at 100%. And if it turns at 62%, you are more likely to get a good reversal. Trendline support, a 78% retracement, and an A-B-C that turned at 62%. We got a much better reversal than I expected. There was no reason to exit until we got to the rectangle area at lunch hour.

I don’t trade rectangle breakouts unless there is a nice volume increase, but the pattern on this one looked good. A breakout at about 11:00 (Pacific) followed by a pullback to the support at the top of the pattern. The first target on a rectangle is when price duplicates the width of the rectangle. That was the high of the day.

There was a nice Fibonacci Cluster at this morning’s bottom using a 15 minute chart that shows the entire week’s trading. Unfortunately the setup was heading back into the congestion of the last two days, so I wasn’t willing to take it. But it’s still a great example of the type of trade that can occur when a number of signals hit at the same time.

The first setup (in yellow) is an A-B-C pattern that took two days to build. The measurement from Wednesday’s top to point “A” is duplicated by the move from “B” to “C.” This is often called a Measured Move (100%) and is quite tradable by itself.

The second Fibonacci setup (blue) occurs when the movement from “A” to “B” is retraced by 127%. This is where the market will often turn. First it breaks support triggering a number of stops, and then it reverses.

Point “C” also created a Wyckoff Spring, since point “A” marked the level of the lows for the last two days. A Spring is where an important support level is broken and the market, instead of continuing, reverses back through that level.

The final factor was the Fibonacci retracement from Monday’s low (magenta) making a nice 62% pullback. Four reasons for a bottom, and the rest of the day made a steady climb to the close.