Trading What I See

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.

On May 1st I titled an entry “Time and Target” with an illustration of how a triangle will often give you a price level and a time projection. Most of my trading deals with recognizing recurring setups in the market, and with slight differences we had almost the same pattern today.

We started with a small surge to the upside, breaking through yesterday’s high and reversing. When a market breaks through resistance and can’t continue, it will often create a Spring setup. The next hour retraced yesterday’s final rally and stalled at a support level that was already on the chart. For a while it looked as though we were finished for the day.

The first pullback was 50% for a second logical short entry, but then the market couldn’t seem to break down. The key was to look at the volume. The combination of volume and price action forms the same downside triangle we saw on May 1st. Shortly after 10 (Pacific time) we broke lower on increasing volume. As often happens, there was a pullback to the broken support followed by a move to the triangle target. Another nice short sale entry with a close protective stop.

The first target is a line drawn parallel to the opposite side of the triangle (magenta.) And often this level is reached just when the two trendlines that create the triangle cross. Trading with Technical Analysis is just recognizing setups you’ve seen before, but doing it in time to take action.

For pattern analysis I still think the best book is one many call the “Bible” of Technical Analysis. Check out the link below.

Edwards and Magee: Technical Analysis of Stock Trends

It’s nice to end a trading example and have everything work so precisely. Not only did we hit and reverse at that 262% Fibonacci target I mentioned yesterday, but we did so at a logical time interval. Before I explain, a quick message.

I’ll won’t have computer access for a few days. Hope to be back online by Monday. In the meantime — Good Trading.

Lowell

The first chart today is just the completion of the patterns shown yesterday. As expected, we reversed right at the 262% Fibonacci extension, completing a nice A-B-C move. What I’ve added is a timing signal that I mentioned once before. In a triangle pattern, there is often a reversal just at the time that price reaches the apex of the triangle.

Like many other things I follow, I never trade this by itself, but as you can see in the example, Time and Target matched up exactly. Sometimes it is just a big bounce, and sometimes an actual reversal. Because of declining volume on today’s rise, I think this time it is probably just a bounce.

Since I won’t be commenting for several days, I’m including a Daily chart that shows some potential problems. You’ve just seen an example of the power of a 2B reversal. If you need a refresher, check this earlier post, or buy Trader Vic’s book from the link at the end of this post.

On the Daily we broke a well-established uptrend on February 27th. I’m sure you remember that day. We’ve spent the last two months trying to regain the earlier peak, and as soon as we did, the breakout failed. I prefer a cleaner top, but that certainly looks like a large scale Trader Vic 2B setup to me.

And the entire rise from the bottom in early March looks like a rising Wedge that broke down yesterday. If it is a wedge (and remember I don’t try to make predictions) the initial target could be around 760.

But the nice thing about day trading is that you can use these longer term patterns as general guidelines without becoming commited to any one direction. Do as I do and just trade what you see — one trade at a time.

Victor Sperandeo: Trader Vic - Methods of a Wall Street Master

You’ve probably noticed that recently I seem to be showing a slightly larger picture of market action. Actually I try to look at this every day, but since right now I can’t follow the market in real time (and may not be able to for another month), the larger picture is what I see first. And it has been providing interesting information.

On Thursday I pointed out the Trader Vic 2B Top. They don’t always work out, but since they allow a close stop, I never ignore them. They are, of course, a specialized instance of the Spring patterns I like to trade. Since the pattern took over a day to form, it was a warning that the larger trend had probably changed to down.

Friday and today completed what is called a Downside Triangle with a downside break after about four hours of trading. Triangles of any type usually break with a strong price surge, and today was no exception. One thing I watch for in all patterns, but particularly in triangles, are internal Fibonacci measurements. The better the Fib setup, the more likely the triangle is to work as expected.

I have three peaks numbered in the chart representing the three rallys making up the triangle. The second rally is 62% of the first, and the third rally is 62% of the second. That type of symetrical pattern seems to make the breakout more likely to reach its minimum target. In this case the target is the parallel to the upper edge of the triangle which we hit near the close.

The triangle itself is made up of an A-B-C pattern which has passed the two first logical Fibonacci targets. Notice how it tried to bounce at 100% and 162%. If it continues, the next target will be 262% which usually creates a bottom. And if it develops into any kind of panic move it could drop to 426%. Check out a longer term chart and you’ll find old congestion near these levels.

Which doesn’t mean we won’t turn around tomorrow morning. Fibonacci targets are not predictions, but if you’ve read this commentary for very long you are aware of how often they work out.

Trading gaps requires two different approaches, partly depending upon where price opens. Recently I’ve pointed out a number of occasions where price would open at a 127% external retracement of a previous move and then immediately reverse. That wasn’t the situation today.

Today we opened slightly above the 162% external retracement of yesterday’s last decline. It is between 127% and 162% that I watch carefully for reversal signals. Once we pass the higher measurement it usually means that price will continue for a while. Before I show how today’s continuation and final top made trading sense, let’s talk about yesterday.

On the 15 minute timeframe I was watching a large triangle break to the upside. I didn’t mention it on the site because there was no increase in volume with the breakout. As I’ve said many times, an upside breakout without a volume increase will often fail. But just because they often fail doesn’t mean that some won’t work out. You must decide which is more important to you — never missing a “good” trade or having a higher percentage of winners.

When we opened with a nice gap this morning I wasn’t thinking of triangles, but of gap statistics. I hope those of you that have been reading this commentary for a while (or have read the more than 150 days of archived analysis) were thinking of the Victor Sperandeo quote I first posted last November after a similar gap.

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.

In that post I also mentioned how to find a logical target for specific measuring gaps such as we had this morning. It was certainly nice that both the measuring method and the triangle target were at the same level, because that’s precisely where the rally stopped.

The easiest way to find the primary target for a triangle is to draw a parallel trendline to the edge of the triangle. This creates a trend channel, and these channels are often where price finds serious resistance.

The gap measuring method says that a continuation gap occurs approximately half-way through a rally or decline. You’ll notice that this measuring gap met the requirements.

A third reason for profit taking at that level was the pivot high on March 22nd. Today’s high was within a point of that chart resistance. We then spent the rest of the day creating a small rectangle.

Of course this all assumes you got into the trade by remembering Trader Vic’s statistics. His book is an excellent trading resource — see below.

Victor Sperandeo: Trader Vic - Methods of a Wall Street Master

Another pullback day with weak volume, adding about two points to last week’s close. I pointed out some rectangle trades Friday, and said that I would be very cautious even if the pattern continued.

Today’s chart covers two sessions, and I’ve drawn several patterns on it. The blue lines are last week’s rectangle, which broke to the upside about 11:15 this morning (Pacific time.) The magenta trendline used Friday’s pivot connected to another at 8:00 today. We bounced twice more from that line.

The yellow lines are a sloppy triangle, with a parallel trendline that stopped this afternoon’s rally. The breakout shows a small volume increase, but that increase disappears on any longer term chart. I can actually see two additional valid ways I could draw that triangle, but they all break out at the same time.

With all of these patterns you might think I would be pointing out many profitable trades, but from my perspective it is the complete opposite. I don’t think any of these trades provided safe entries.

When I find too many ways to interpret a day’s chart I begin looking at longer and longer time frames. And I keep coming back to the daily chart that shows the heavy distribution that started February 27th followed by the weak pullback from the pivot bottom.

This is a classic setup for additional downside action. As a daytrader I’ll be quick to change my mind if we get some good upside volume. But for right now, I’m really expecting a downside break to at least re-test last week’s lows.

I wish the Fed would make its announcements over the weekend instead of messing up a perfectly good trading week. But even on Fed day the Fibonacci levels keep working. I just question whether it is worth trying to trade them.

We started with a fast drop that reversed right at a 127% external retracement of yesterday’s last rally. It was no surprise that we then went into a sideways pattern as everyone waited for the Federal Reserve Policy statement.

I’ve marked two A-B-C patterns — one in yellow and one in blue. This type of overlapping pattern will often end in a Fibonacci cluster with several measurements pointing to the same level, in this case to point “C.” On another day this might be tradable, but I took a long walk about that time.

There is one interesting feature today that is sometimes quite useful. Although I first heard about it from Robert Prechter (Elliott Wave Principle), it is best explained in Connie Brown’s Technical Analysis for the Trading Professional, one of my favorite comprehensive trading books.

Notice where the two trendlines that create the triangle pattern cross. After a triangle breakout the market will often change direction right at the triangle apex. The top came very close to a Fibonacci 162% of a even larger A-B-C pattern, so you would have had both a price and time target. Always useful information.

Connie Brown: Technical Analysis for the Trading Professional