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January 6, 2005 Comments: Euro FX futures gapped open lower, right at the down sloping Median Line. If you recall yesterday's commentary, I was short the Euro FX futures at 133.10, with a stop at 133.25. I took half of the position off [because that portion was a day trade] at the 50 PCT retracement at 132.70 and let the rest ride overnight, looking for a test of the down sloping Median Line. As I stated yesterday, my profit order was at 131.75 and I was filled on the open, for a nice profit. I called my broker, reconfirmed the fill and confirmed that the fill made me flat, then double checked that all orders were now cancelled.
Price worked its way higher and approached the Upper Median Line Parallel at the 132.22-25 area. As I said yesterday, I am expecting a series of waterfall moves if the Euro FX futures are to continue lower, until a really ugly spike lower occurs, drawing in the "last minute panic sellers," and I contemplate getting short again at the 132.22 level. I have the order typed in and...well, the market doesn't "feel" right to me. Maybe its the nice overnight profit sitting in my pocket, maybe it's just that the market is acting a bit lethargic and trading slow.
In all honesty, it's because the down sloping Median Line has been describing price, but has also been in real danger of having price "drifting" to the right of its boundaries over the past few days. This happens because the slope of the Median Line is steep enough that when the number of new sellers begins to slow enough, price no longer descends as fast, so time moves price out of the Median Line, even though price may still be in the same down trend. This drift is common and it is why we have developed different ways to use the same tools--for example, drawing a "second pivot" Median Line once price drifts out of the original Median Line. And of course, the Modified Schiff Median Line is one of the original solutions for dealing with price drift because of steep price slope, but neither of these two lines help me much, so I don't "like" the trade location and I pass on getting short at 132.22.
As you can see, 132.22 was the *Perfect* place to get short for a quick scalp [Isn't that always the case when you see a perfect set up and then pass on the trade because it "feels" funny?]and from there, price moves down to nearly test the morning's low. If you HAD gotten short, you would have had two choices: take profits as price approaches the 131.75 area or stay short, trail stops and look for a re-test of the down sloping Median Line, which at this point would now be down at 131.25.
Remember me pointing out that you have to watch the slope on these lines and adjust your support and resistance areas accordingly after every bar closes? From the open until roughly 10 am, the interaction point of the Median Line with price has moved from 131.75 down 50 points to 131.25. Being aware, in real-time, of these little things is what makes or breaks traders.
The Euro FX futures test the early morning session's low and then turn right around. As this bounce starts to develop, I immediately think that it's likely an energy coil is forming. Price has come a long way in a short period of time and it needs a rest. It won't surprise me in the least if it paused here to regain energy before its next move.
And price does just that. It scoots higher, re-testing the highs at 132.25 and in the process, drifting to the right of the Median Line set I had been working with. Maybe my intuitions weren't so bad after all...Then price sold off to bounce its way lower along the outside of the down sloping Upper Median Line Parallel, eventually making a new low for the day, but then quickly moving back up into what I marked as the energy coil [132.25 to 131.75].
If you recognized the energy coil forming, you could have range traded it quite effectively. This market is notorious for these consolidation periods and if you are nimble and use stops and profit orders effectively, you can tear out a nice chunk of change trading these ranges while you wait for the motor to get recharged. I'll soon have a nice small "chapter book" available on the web site dealing specifically with trading energy coils.
Someone asked if I watch cash FX charts at all or only the futures markets...Here's a 60 minute chart of the cash Euro FX against the Dollar: |
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Price is in a gorgeous down trend, but again, I get a sense that we have tested that Upper Median Line Parallel too many times and made too little progress down into and past the Median Line itself--in short, though this chart looks like price is closing poised at the perfect place to enter a short position, I am leery, because I sense a drift by price to the right is as likely as a move straight down from here.
If you look at the day-only futures chart and the 24 hour cash chart, you can get a sense that in this case, I am using the day-only futures chart to temper the view I have when looking at the 24 hour cash chart. The two work hand in hand, and the lead does pass back and forth. The clues can be subtle, but one often tips its hand before the other.
We'll see if price shoots lower from here, as the cash chart suggests, or consolidates further, as the day-only futures chart suggests to me, with the formation of the energy coil. Please note: I did not become bullish...I became cautious of new short positions at these levels until I see further price action unfolding. There is a very big difference!
Act, don't Re-act! |
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