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.

Evidently the market decided it wanted to spend some more time working inside the daily rectangle. In fact, today we dropped back almost to the center of the pattern. With a gap down opening, price built a floor just under the 850 level and went sideways until after the lunch hour.

When there was no trade in the first hour, I marked off the range and waited for a breakout (A) and a possible pullback (B.) Then I passed the trade that turned into a Measured Move.

On pullback trades I want to see a decrease in volume before I’m comfortable with a trade. Sometimes volume doesn’t make a difference, but over time I get better consistency when I insist on either correct volume or multiple reasons to take a trade. At least I got a lot of paperwork done today.

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.)

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.

Returning on a Fed day doesn’t make for exciting trading. As you might expect, I marked off the first hour range and then joined a lot of other traders waiting for a good breakout that never happened. I think perhaps summer trading is finally here.

With the lack of action, I’m just posting a daily chart showing the limits of recent movements. April and May formed a rectangle, and now at the end of June we have another. However, as yesterday’s trend day demonstrates, you can still get a good move even when the larger pattern is basically sideways. It just takes a lot more patience during slow trading periods.

With the market closed next Wednesday for the Forth of July holiday there may be a lack of activity for the next several days. Because of this my posts, as today, may be a little short. If you are trading, be sure to wait for clear setups.

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.