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April 20, 2005 Comments: Looking at the chart above, you can see that price "drifted" out of the blue up sloping Median Line I had been using yesterday as price moved forward in time, but there wasn't much of a substantial rally. Yesterday's trading was more of a ramble than anything with much direction, though price did end up higher on the day, in a tight Energy Coil. I still feel price will head lower soon, though so far, there is no sign from price for me to hang my hat on.
Note that I did a very general count of the pivots, the sort of count Dr. Andrews would teach. Remember: This isn't Elliott Wave theory--I'm just trying to keep track of alternating pivots. And once I can count from P0 to P4, I draw in a line, the P0-P4 line, which is the "Trend Determination" line. This means that if price moves decisively below this line [after P4 is formed] and price action unfolds below this line, the trend has likely finished and a new market phase has begun. That DOES NOT mean that a down trend follows an up trend immediately, just because a P0-P4 line has been violated. This is a major warning line, for the most part [although you'll see a twist on the use of this line a little bit later]. Now let's see what the opening brings: |
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| Price shot out of the Energy Coil to the down side on the opening, testing the P0-P4 Line, and then breaking below it and closing below it during the next bar. Then price worked its way erratically higher, making a new high for the move to 1157.75 before settling into something that resembled a range or Energy Coil just above the P0-P4 Line. The narrowing ranges make me think a larger move is immanent, and when the last bar has an even narrower range and closes below the P0-P4 Line, I start to sit up and take notice. Maybe there IS some direction forming here...Let's see what I can come up with: |
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| I add a red down sloping Median Line, using yesterday's high, the low formed below the P0-P4 Line during the second bar this morning and today's spike high at 1157.75. I am drawing this particular Median Line set for a reason, and this is a little something I haven't talked about here on the web page before, but it's something I do regularly in my own trading. I draw this Median Line set, choosing the pivots I chose, specifically to show me the slope of price and the rate of decline IF price continues to make head way down below the P0-P4 Line. In other words, I chose the pivots of this Median Line specifically to give me the likely path of price IF it moves lower from this point on. If what I just said isn't clear, wait just a moment and view the next chart and read the explanation and perhaps you'll get a glimpse at the madness behind the method: |
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Now looking at this chart, you can see that I specifically chose a set of pivots that would give me something specific IF price DID NOT continue lower from this point: Namely, I selected this set of pivots because I wanted to know the up side Energy Potential and the down side Energy Potential [where price would most likely run out of energy on the up side and down side IF price stayed within the range bounded by the low of the day and the high of the day] of price in its "current" state.
Why would I want to know both of these things? Well, I want to know the current likely areas where price would expend its energy because these areas are like road signs and they are built on what IS happening right now. And why would I also want to know the slope and rate of decline IF price moves out of this current range? IF price does NOT run out of energy to the down side at one of the markers shown by the current green flat sloping Median Line and its parallels, I'll have a sign of a price failure AND I'll already have in place a measure of the most likely slope and rate of decline of the new move, if one begins. In other words, I am laying a map of a potential new move over the map of the current conditions. Let's see what that would look like: |
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Here's both maps overlaid on price. The green Median Line set shows the current energy potential and slope and the red Median Line set shows the potential slope and energy potential IF a down side move unfolds from this point.
Now note again that price closed below the P0-P4 Line again and also note that price has now closed below the green flat sloping Median Line. I like the fact that price had no problem closing below this area of confluence made by the P0-P4 Line, which is actually a Center Line in the Action/Reaction Line sets, and the green Median Line. Price IS showing more energy to the down side than the current Median Line would predict and I decide I'd like to try another short position. Let's see if I can diagram out a potential trade set up that has solid risk reward in it: |
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Looking at the chart, you can see the plan diagrammed out: I'll sell a rally that gets close to the confluence formed by the green Median Line and the P0-P4 Line and this confluence comes in at 1152.75. Because the P0-P4 Line has an upward slope to it, I won't move far from this intersection price for my order, because I like price to "stretch" to test these areas. I'm going to work my limit sell order at 1152.50. And my initial stop loss order will simply be three ticks above the 1154.50 mini swing high, at 1155.25. Like yesterday, I still expect a significant sell off in this market, especially if it continues lower now down through the P0-P4 Line.
For a profit target, I'll use the red down sloping Lower Median Line Parallel, which is where price SHOULD expend its energy on a sharp move lower [though I have a hunch price may test and break the lows made last week, but that's a hunch, not Median Line work]. I measure where price is likely to intersect with the red Lower Median Line Parallel, using the average ranges of the last twenty bars as a guide, and I get an initial profit target of 1143. This gives me a risk reward ratio above 3.4, so that's more than adequate. And remember, should price break down from here in any extended move, the profit target will adjust lower, as we discussed yesterday, because the red Median Line set has a negative slope.
I like the way these orders look, so I enter my limit sell order at 1152.50 and my initial stop loss order at 1155.25. Now let's see if price rallies to get me short: |
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| Price opens unchanged and then rallies right to the confluence formed by the green Median Line and the P0-P4 Line, where it *should* run out of up side energy. And it does indeed turn lower right at this test of the confluence, but not before getting me short at 1152.50. This bar tests the red down sloping Median Line and then closes in its lower half. As soon as I confirm I am short at 1152.50 and my stop loss order is being worked at 1155.25, I enter my initial profit order at 1143. |
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| Price opens unchanged and then spikes lower in a wide range bar, zooming through the red down sloping Median Line and the green Lower Median Line Parallel and this bar closes on its lows, well below both these important lines and at a new low for the day. Once this bar closes, I move my initial stop loss order to break even. I briefly ponder moving the stop even closer to the action, perhaps just above the green Lower Median Line Parallel, but I decide to work the break even stop for now, giving price a wide path in case the market noise picks up. |
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| The next bar opens a little higher, then tests the low just made by the prior bar and then moves back to close higher. Note that the range of this bar is narrower, which you'd expect after a nice spike lower. Price is resting a bit, catching its breath and re-storing the expended energy. This bar left a double bottom with the prior bar and the next bar is nearly a mirror bar, leaving a double top and having nearly the same range, with one important exception: This bar closed on its low, a new low for the move. And the next bar follows through to the down side, making another new low. But when it closes unchanged, I immediately move my stop from break even to three ticks above the double tops just made. They were at 1148.50, so my new profit stop is at 1149.25. And I also adjusted my profit order a touch lower, to reflect the negative slope of the red Lower Median Line Parallel. |
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| Price trades higher with about the same range as the mirror bars and manages to test the red down sloping Median Line. IF you were looking to add to your position, or missed getting short, you should be selling at the intersection of this red down sloping Median Line IF it gets tested, with the same stop I am currently using, three ticks above the double tops at 1148.50. The next bar also tests the red down sloping Median Line [another chance to sell if you need to...] before plunging lower, nearly touching our profit target. Although I'd like to move my stop profit closer to the action, I don't see a logical place to put it, so I leave it where it is for now. |
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The next bar opens higher but then continues a little lower, making a new low for the move but not quite making it to our profit target. As this bar closes, I re-adjust my profit target to reflect the downward slope of the Lower Median Line Parallel again, and it's now at 1142.25.
The next bar makes another new low and this time, tests the red Lower Median Line Parallel, peeking below it briefly, and I am filled on my profit order at 1142.25. I cancel all other orders and double check that I am flat.
I still have the nagging feeling that price will test and break the low made last week but I also know that I have executed my plan as I envisioned it and it netted me 10 1/4 E*Mini S&P points per contract. I have done what I am supposed to do as a disciplined trader: Mark out a logical trade plan and execute it as price unfolds. If I do that day in and day out, I'll continue to be a successful trader.
I hope you all find this trade example both interesting and informative. And of course, I wish you all good trading!
Act, don't Re-act! |
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