Trading What I See

For those having trouble accessing the site yesterday, evidently the server holding Trading What I See was having high load issues. It took me several hours to post yesterday’s comments. When I checked, the web host was working on the problem. My access seems much faster today, so perhaps it is solved.
Lowell

Today the Russell 2000 had the fifth narrowest range so far this year — 5.9 points. And that range occurred right at the top of the daily rectangle. Actually this could be good news.

When price makes a continuous move from deep inside a pattern and then immediately breaks out, the odds favor a failure. Too much of the rally strength has been expended inside the pattern. However when there is a pause near a pattern’s edge, then a high-volume breakout is much more likely to succeed. But right now I’m waiting to actually see that breakout before I get excited on the upside.

Not much else to say on today’s action. We turned up at a Measured Move (C=100%) and developed a triangle formation. However the breakout had no volume behind it, and price reversed just above yesterday’s high before coming anywhere close to the triangle target. Not surprising with the lack of volume.

Another indication of the slow trading. The NYSE Tick ($Tick) never hit either a plus or minus 1000 today. I only watch the Tick at critical points, but most days one direction or the other will have some bias. And I would expect to see a high reading there when we finally break from this consolidation pattern. Maybe Monday.

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.

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.

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.

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

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.