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.

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.

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.

You’ve probably noticed that I try to point out turns that have multiple indications, since these setups are more likely to work out as expected. If three signals or indicators point to the same result, there could be three times as many other traders pushing price in your direction. Not everyone is looking for the same setups.

Today is an example of multiple versus individual signals. At the bottom marked “A” there were three reasons to expect a reversal at almost exactly the same point. At “B” there were also three potential reversal signals. But at today’s close I can see at least four different levels where a reversal would fit my trading style. And they are not the same.

At “A” we were making a double bottom with the pivot from June 8th. At the same time we finished an external retracement of 162% times the rise to “X.” That is often a Fibonacci turn measurement. And if you’ve learned how to use continuation gaps as a measuring tool, the distance from “X” to the center of the gap was exactly the same as the distance from the center of the gap to “A”. (For a refresher, see Trading Gaps from early April.)

Not only did the center of the gap mark the half-way point — it also provided resistance to the three-bar pullback after the gap. Each of those rising bars had less volume, so just from a chart-reading standpoint the first red bar could be an entry for a short sale.

At point “B” there was a 62% retracement of the entire move down from “X” just as we hit a trendline draw through the first pullback after the top. On June 4th I pointed out how forgotten trendlines drawn across first pullbacks will often mark later reversals — but you will only see them if you leave old trendlines on your charts.

Not shown (except for the Fibonacci level marked at the top) is an internal First Pullback Fib measurement. The top at “B” is at the “normal” 262% external retracement. That makes three reasons to suspect a reversal.

Contrast these pivots with the situation at the close. We have just hit the 127% external retracement of the rise from “A” to “B.” But if we fall a little farther, we’ll get to the yellow parallel. And if that doesn’t hold, there is always the long blue trendline that could turn prices upward. But before we get there it’s always possible that we’ll turn when “C”=100% of “A.”

Waiting for too much confirmation misses trades. But would you rather take a position at “A” and “B”, or take a chance at what will eventually become “C.” As soon as you see a potential setup, start looking for other indications of a turn. On good moves, it’s surprising how often there will be more than one reason to trade.

The first market report I heard this morning talked about the drop in the Chinese markets, and suggested we might be in for a repeat of the February drop. The gap below yesterday’s low might have hinted at that outcome, but in less than 30 minutes we were back inside yesterday’s range. Oops!

A gap outside of yesterday’s range followed by a reversal sets up the Larry Williams Oops! pattern. As I said in a commentary last year, I don’t trade the Oops! pattern by itself, but will often use the setup as a trading bias for the rest of the day. I want a very strong signal before I will trade against it. Larry says in Long-Term Secrets to Short-Term Trading that

It is the most reliable of all short-term patterns I have researched and traded.

Today was an example of the setup’s power, and the reason for passing any possible short setups today.

After the Oops! pattern triggered (entering yesterday’s range) price completed a 78% Fibonacci pullback of the morning drop. Then it made a 50% retracement of the rally and couldn’t penetrate yesterday’s low. That bounce from support at the 50% level, combined with an upward bias, would be good for an entry at the first green bar for a rally to yesterday’s high.

The mid-day sideways pattern could have been seen as a Test of Top or perhaps even a Spring setup. But Don’t Bet Against Larry. His statistical research is excellent, and I would need a much clearer setup to consider a short here. The Oops! is a longer term pattern than my normal trading, so I would consider a trade against it as counter-trend.

One more 50% pullback to the support of a previous pivot and the market rallies into the close. One of the reasons the Oops! pattern works is because many traders get caught on the wrong side of the market. As price keeps rising, more and more of these traders finally give up and cover their shorts resulting in a day with no pullback greater than 50%. Thanks, Larry.

Larry Williams: Long-Term Secrets to Short-Term Trading

After testing the top of the daily rectangle yesterday, we gapped down at the open. This particular type of gap provides useful information whether you trade it or not.

Notice that the center of the gap is precisely 50% of the distance between the top and bottom of that swing. Also that the swing itself is the second pulse downward from yesterday’s top. When you see this pattern, there is a very high probability that the downmove is not complete.

The reason has to do with the internal structure of Elliott third waves, but all you need to know is that the next pullback normally makes a nice short sale. And since that pullback retraced a Fibonacci 38%, ran into resistance at a pivot from yesterday, and stalled at the bottom of the morning gap, there were three reasons for a reversal.

What followed was a nice A-B-C Measured Move for a potential 10 points of profit. If you didn’t get out at the first bottom, the next one had a warning divergence.

And notice once again how previous support or resistance levels (in this case yesterday’s low) are so important as reversal areas. It stopped the first decline (which could also be measured using the gap as a halfway point), and then stopped the rally when price hit it from the opposite direction late in the day, with the second touch forming another divergence.

Fibonacci, Support and Resistance, and trendlines give you the map. Lots of screen time and after-market analysis help you learn to see the setups in real time. Then it’s a matter of taking the trades that make sense to you as they occur. Of course that last part is always the most difficult.

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.