Trading What I See

First Pullback measurements are always external retracements (see yesterday), but they are Fibonacci ratios that few seem to follow. You can mark the Fib levels for the next potential turn as soon a reversal pivot forms following the first significant pullback.

Today each of the major reversals turned at one of these levels (all shown with white lines and arrows.) The 7:30 bottom turned at 127% just as it reached the continuation of a trendline from one of yesterday’s pivots. It also had a Stochastic divergence, and lead to the best move of the day.

That mid-day rally also ended in the same manner, but this time at the 262% external retracement of the first major pullback. This is what I consider a “normal” move. Once again the turn also had confirmation from a trendline at the top of a channel.

After making the high of the day we had another move down. For the third time, the actual reversal near the close was a 262% external retracement of the first good pullback.

This doesn’t work every time, but that’s the case with all support and resistance or Fibonacci levels. They give you an area where turns are more likely to take place. It’s up to your trading plan to give you entries to take advantage of them.

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’s pre-market trading made a quick drop with the early reports, but gained it all back during the first three-minute bar. Up another five points, and we had completed the range for the day. About the only thing the market accomplished was to reach the 78% retracement level of the last decline. That’s a real disappointment after yesterday’s rally.

As I’ve mentioned before, if I can’t see a reasonable trade in the first hour and price is moving sideways, I mark off the high and the low of the early range. Then I look for either a breakout followed by a setup, or a “perfect” trade that acts as though it will escape from the range.

It’s amazing how often this simple act will keep me from trading when the market becomes rangebound.

There were several 78% pullbacks inside today’s congestion. This often happens when the market doesn’t have any sense of direction. And until it figures out where it’s going, my job is just to watch.

I’m not sure whether to call today an inside day or not. It waited until the last three minute bar to poke its head above yesterday’s high, but I can certainly call it an uneventful day. Which makes it a nice time for a little review.

Many times a week I talk about Fibonacci extensions, usually with at least a minimal explanation of what they are. Today I want to go over them in more detail. The market was nice enough to provide examples of the three most common measurements.

A Fibonacci extension is sometimes called an Alternate Measurement, because what you are doing is comparing alternate swings. In other words, the two swings are consecutive movements in the same direction. At the beginning of today’s chart we would measure the length of the swing from “X” to “A” and compare it to the swing from “B” to “C.”

Sometimes you’ll hear traders talking about an A-B-C move, and this is what they mean. Another way of describing it would be an Up-Down-Up move, or the reverse, a Down-Up-Down move. The Fibonacci part is the stopping point at what I am calling “C.” There is a surprising consistency when you compare the “A” and “C” movements.

A common ratio is when the two moves are equal (100%.) We’ll often call this a Measured Move, and you can see this in the yellow Fibonacci extension marked on the chart. Often (but not always) the “C” move will have less momentum than the “A” move, and this leads to an oscillator divergence that I’ve marked in the lower pane. I like to take trades where a divergence occurs at one of the common Fibonacci extensions.

The second common measurement is when the second move (in the same direction) is 0.618 times the first move. I’ve market that in magenta. The B-C leg is 0.618 times the C-A leg. And again it ends with a Stochastic divergence.

When I see a Measured Move I think of the market as being in balance — about equal upwards and downwards pressure. When the market stops at a 0.618 extension I feel that shows a strong potential for a reversal, and today that was from down to up.

The measurement shown in blue is the third most likely ratio, with the “C” move being 1.618 times the “A” move. This obviously shows a bit more strength than either of the other ratios.

There are two more Fibonacci ratios that appear in these extensions. If price doesn’t stop at 1.618 it is likely to move on to 2.618. And a truly strong move will usually end at the next ratio — 4.236.

Of course sometimes the market becomes perverse and figures out some entirely non-Fibonacci level to turn, but that doesn’t happen as often as most people think.

If you look carefully, inside the marked moves on this chart you can see smaller A-B-C moves, and many of them are also these same Fibonacci ratios. When you have different sizes of Fibonacci measurements all pointing to about the same place on your chart, we call these Fibonacci clusters. When this happens it creates even better trades.

Just remember, you shouldn’t use Fibonacci levels as entry points by themselves. You need some additional kind of trigger. And sometimes a Fib level just means a pause rather than a reversal. But used correctly, Fibonacci extensions will give you one more type of market edge. And that’s what we need to trade profitably.

You always wonder whether a long weekend will make a difference. Will Fibonacci calculations still work using the old data? Do you have to change your trading tactics?

Last week we had slow holiday trading. Then we had a day off for New Years. Yesterday there was a market closing for a state funeral. Today the market continued from where it left off as though there were no break at all.

Let’s start with a 15 minute chart to show some measurements. The gap this morning went up to the high of last Friday and couldn’t get any higher. Even on a 3 minute chart, no bar was able to close above that level (point B.) When we get to a shorter term chart you’ll even find a divergence there.

If you are not already doing it, always mark in the highs and lows of the last few days — most software packages will do this for you, but if not, draw them in by hand. Like Fib levels and trendlines, how the market acts at these levels is critical trading information. When the market couldn’t break that level and it corresponded to failure at the yellow down trendline, your trading bias should have switched to the short side.

Still working from last week’s data, the turn at point “C” happened at a logical set of Fibonacci measurements. The distance from “X” to “A” multiplied by 1.618 is exactly the distance from “B” to “C.” That’s called a Fibonacci extension, and the most common measurements are 0.618, 1.00, and 1.618.

And whenever price exceeds a previous pivot point (passing point “A”) you should measure external retracements — those are retracements over 100%. The most common is 127%, but if price doesn’t stop there it is likely to go to 162%. Point “C” just slightly exceeded a 162% Fibonacci retracement of the “A” to “B” distance.

Now let’s look at my trading chart - a 3 minute timeframe. At “X” you can see that there was no real breakout above Friday’s high (green line.) From there until just after lunch time (first blue arrow) it looked like we might just go sideways for the rest of the day.

But by 10:00 (Pacific time) my moving averages were starting to move downwards, and we were hitting a downtrend line drawn from “X” to “B”. Add to that a pullback to the blue declining moving average, and a short sale with a very close stop is possible. I like close stops, and will often use the blue (13 period) moving average as a trailing exit in case I’m wrong.

Two more pullbacks to the moving average (arrows) could be used for additional short trades, depending upon your trading style. All of them would have been profitable. The question is why I haven’t marked the last pullback (after “C”), which would have been a loser.

Here’s a Fibonacci measurement you won’t see talked about much, and it keeps me out of this kind of bad trade. When we’ve had a strong move, I’ll go back to the first pullback and draw a Fibonacci extension. A strong move will pass the normal reversal points (.0618, 1.0, 1.618, and 2.618) but it’s an unusual move that can get beyond the next level (4.236) without a good correction in the other direction.

Combining this with the 15 minute chart, point “C” is the target for three Fibonacci measurements - a good reason to quit chasing the downside for a while. It looks like a few days off didn’t affect the market’s memory at all.

Wrong again, but all my trades today were profitable. I think there’s a lesson worth learning there. One of the reasons I don’t actually trade Elliott Waves is that the wave counts I see can turn into other wave counts that still make sense.

That’s the nature of the Elliott beast, but if you only use it as a guideline combined with other techniques, it can often give you pinpoint accuracy. But not yesterday. Let’s go over trading by the numbers.

Point #1 is the “top” I saw yesterday, with three Fibonacci measurements ending there. That pivot was the reason I came into today with a downward bias. After the first 3 minute bar, I placed an order for a short sale. As is often the case, my entry techniques offer a certain amount of protection when I am wrong.

I use an array of entries depending upon the situation, but let’s look at some possibilities that would be appropriate here. Sometimes I’ll enter at the break of a previous bar (that was the case today.) Other times I’ll use the short-term moving average (blue.) And there was a well established uptrend line from mid-day yesterday.

It doesn’t make any difference how strongly I believed the Elliott count at that point. I picked Trading What I See as the name of the site for a reason. I want all my actions to have criteria that I can explain. The opening bar wasn’t broken; the moving average wasn’t broken; the trendline wasn’t broken.

If any of those entries had triggered, I use front-end software that sets my exit stop the second the trade fills. I don’t even have to think about it, except to sometimes move the stop closer. Point #2 was a potential trade that I treated just like any other trade. When it doesn’t trigger I look on to the next possibility.

As pointed out several times in the last few days, when the 2.618 extension doesn’t stop price, look to the 4.236 extension. Once again, I “expected” a pause and probably reversal there, but that will never make me take a trade. But by point #3 there was a nice divergence with the Stochastic, and I made my first trade of the day as we broke the blue moving average.

And didn’t go anywhere (point #4.) After seven bars I covered half of my trade. As the blue moving average recrossed to the upside I covered the rest. First profit of the day — it was 40 cents after commissions.

It wasn’t long before we had a well-defined rectangle, but it is only a point wide. That means I’m not interested in trading the breakout at point #5. But watch what happens next. A pullback to the bottom of the rectangle. A poke through a declining moving average, and a reversal that breaks an established trendline. Point #6 is my kind of trade.

Where do we start looking for an exit. At both the Fibonacci retracements and Fibonacci extensions on the way down. I use them for taking partial profits or for moving my trailing stop closer. Point #7 is 262% of the measurement from points 3 to 4, extended from the top of the rectangle.

“Profit, not Prophet” is something I pasted on my computer monitor years ago as I was learning that predicting the market is a whole lot different from trading it. There really is a lesson in that.

Fibonacci Extensions are one of my most useful tools. I use them to help me decide where prices may turn and, just as important, where I expect prices to continue. Today we had a series of Fib extensions inside a larger extension pattern.

First, a disclaimer. Although I traded some of the smaller patterns today, I didn’t recognize all of the internal relationships until tonight’s analysis. And although I’ve used standard Elliott Wave labels because they fit so well, I’m not really an Elliott trader. (Note that some letters are lower case and some in capitals.)

We gapped down this morning, opening below yesterday’s low. After a fast drop to the level of the December 1st pivot bottom, we reversed and climbed back to more than fill the gap. My first thought was “Oops!” If you are not familiar with this, it is a Larry Williams pattern that plays reversals of gaps. Point “a” would be a buy signal.

I don’t trade the Oops! pattern by itself, but that signal gave me an upside bias. But only until 8:00, when we reversed from point “c”. The reason was the extension level that we reached. Let’s go over extension measurements again, using this first rally as an example.

An extension measurement takes the distance of a move in one direction, and applies several percentages of that distance to the next move in the same direction. In other words, we would compare the distance from “X” to “a” with the distance from “b” to “c”. In a normal movement the second length will end up at either 62%, 100%, or 162% of the first length. This time it was 62%.

If the Oops! pattern were going to work I would have expected at least a 100% extension, also called a Measured Move. When that didn’t occur I became very cautious. That doesn’t mean I quit trading — just that I no longer had an upward bias.

The movement down from “A” to “B” subdivided into a smaller a-b-c , although the Fib relationships were not as exact as I would like to see. Then we had another movement upwards, shown as the white line from “B” to “C.” This is not a simple up-down-up movement, but what Elliott practitioners call an Impulse move. And it ends at a closely packed Fibonacci Cluster.

If you measure from “B” to “1″ and then add the Fibonacci ratios of that distance to point “2″, it gives you the top of points “3″ and “5.” If you measure from point “2″ to point “3″ and use the ratios from “4″ it also gives you point “5.”

Now let’s take a larger look. Measure from point “X” to “A”, apply the Fib measurements and add them to point “B.” Once again you come up with the level of point 5, the entire pattern making up a large A-B-C. Three Fibonacci Extensions all pointing directly to the same level. And that’s where we turned down.

Whether you use Elliott Wave counts or just Fibonacci measurements like I do, the 791.50 level from this afternoon looks like an important number. Remembering that I don’t trade Elliott by itself (BIG DISCLAIMER), that A-B-C pattern looks just like an Elliott correction in a down move. I wouldn’t be at all surprised to see a drop tomorrow back below point “X.” But all that means to me is that I start tomorrow with a bias of down.

Robert Prechter’s Elliott Wave Principle