Trading What I See

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.

Like yesterday we had another narrow range session. The difference is the almost complete lack of good trendline channels and Fibonacci relationships. Usually one or the other will give some good signals.

The first bar spiked down, but didn’t quite reach yesterday’s low. Notice that we already had a trendline with three touches from the previous session. When there is a one bar break like that, I’ll leave the existing trendline on the chart and draw one from the actual low. Today it was the older trendline that held the market at the close.

On the rally the first pullback didn’t even reach 38%, so once again I saw no trades in the first hour. And since we stayed inside that range for the rest of the day, my rules say wait for a high probability setup.

The top was a 127% external retracement of the previous decline, and even though there was a Stochastic divergence, there wasn’t any other Fib measurement that pointed to that level. No trade, and no setups for the rest of the day.

Today was an inside day with little movement, and the few setups that occurred couldn’t manage a break of the first hour’s range. As I’ve pointed out before, a narrow first hour often keeps me from trading unless the market changes character during the session.

The small move up from the open looks as though it stopped at the 127% retracement of yesterday’s last drop, but it was actually higher than that during pre-market trading. There was little volume as everyone waited for the ISM report at 7:00, and evidently that was a minor disappointment.

By the time the report was released we were too far from the pivot for a close stop, so I waited for a pullback that never occurred. Once a narrow first hour range is set, the market will often respect that high and low for the rest of the day. My procedure is to wait for either a breakout or a good setup that looks as though it may break from the range. End result — no trades today. But there still are some examples of setups that I like under better market conditions.

Although the yellow trendlines look like a triangle, I never trust one that keeps going sideways to the apex. They seldom turn into successful trades. But during the lunch hour we broke the bottom trendline and made a 50% pullback. Pullbacks to broken trendlines allow close stops, and often become nice trades when the trend continues. I also like them when the pullback reverses at moving averages that have just changed direction.

Of course we were stopped by the first hour’s low and a longer term trendline that was visible on the 15 minute chart. When the market couldn’t go down it decided to try the other direction. Notice the same setup as we broke another trendline and pulled back into the cup formed by the moving averages.

I use the same rules for trendline breaks that I use on patterns — if the break is to the upside it must have increasing volume; to the downside volume isn’t that important. And of course they shouldn’t occur in congestion like we had today.

After nice signals yesterday, the market wouldn’t cooperate today. We continued yesterday’s closing decline, but none of the turning points matched the Fib levels I was watching.

The first pullback didn’t even reach 38%, and the final decline reversed before reaching a 62% A-B-C. By the end of the lunch hour I though we had a reasonable triangle forming (in yellow), but the upside breakout had no volume increase so I didn’t trust it.

The reversal about 10:30 (Pacific time) was the only good Fibonacci turn of the day. It completed an A-B-C at the 62% level which also matched a 38% retracement of the morning drop. But by that time the moving averages were definitely sideways, so I didn’t even consider a trade.

About the only thing today shows is an example of not forcing trades when the signals aren’t there. We have a fairly well-defined rectangle with this afternoon’s sideways action, so perhaps we’ll get a tradable breakout and pullback in the morning.

So ends day four of a low volume pullback. Although I often remove the volume bars from the charts I show on the site for clarity, I watch it carefully during the day and especially as I analyze the longer time frames.

The longer we go without some good volume on an up day, the more likely it is that we haven’t seen a real bottom yet. Today the market just confirmed its indecision with another sideways narrow-range day.

Using some pivots from yesterday, there is now a large rectangle pattern that some may be trading as we bounce from support and resistance. In the Russell I want a rectangle to have a span of at least five points before considering trading a range, and I also want a divergence as it reverses at the top or bottom. Today we got one of each.

We started the day by trying unsuccessfully to penetrate yesterday’s high. Without a divergence or a close moving average I didn’t consider a short sale there, or a purchase as we moved higher at 7:00 (Pacific.) But when we came back to test the earlier top there was a good range and a nice divergence.

The same setup occurred in the opposite direction about 11:30. I wouldn’t take that first bottom, because there was no divergence. But the market came back down for a second chance at entry, and this time the Stochastic was moving up nicely.

The longer a rectangle extends the more likely a breakout, so if Monday continues sideways I’ll require more confirmation before taking another ping-pong setup.

For non U.S. traders, remember the United States begins daylight savings time this weekend, several weeks ahead of the “normal” schedule.