 |
| Click To Enlarge |
|
|
March 26, 2005 Comments: This is a continuation trade of the one diagrammed two days ago, from March 22. This trade uses the same frequencies to find a suitable up side retracement area where price will likely run out of stored energy and then stall or change direction back to the strong down trend price has been in since early March.
Looking at the chart above, you can see price made a large move down, with no retracements, where it stalled once it tested the green down sloping Lower Median Line Parallel. It's important to note that price moved from the green Upper Median Line Parallel to the green Lower Median Line Parallel in one swift move. In effect, price expended the maximum energy in the minimum time. And more important, price halted exactly where the Median Line set predicted it would run out of energy. The Pivots a, b and c gave us the frequency of this move, which carried both the slope of the path price would take AND the maximum amount of energy price carried with it to expend in a single, quick move. Note that we'll use this same idea in a bit to try to predict where price will again run out of energy. These lines are "energy boundaries," in the real sense, and thinking about them in that fashion may make them easier to use in your trading.
Once price reaches the area where it is most likely to have expended its energy, it can do one of three things: It can change direction dramatically, it can consolidate and begin forming an Energy Coil to re-store the expended energy or it can continue its move past this area, generally by accelerating. Each of these cases obviously require different strategies, but the important thing to remember is that these lines serve as important areas, where price is highly likely to change its current state of action. In this case, price consolidated for six bars, forming a double bottom, and then slowly began to climb out of the Energy Coil or range to the up side. Price traded above the down sloping Median Line for several bars but was unable to hold those gains and closed the day back below the green up sloping Median Line. At this point, we can only say that price reached the area where it should have expended its down side energy. Then it consolidated, perhaps with a brief up side bias, but at the close of the day, it is not clear where price is headed, so we'll continue to think of price as still being in that consolidation after the sharp move down, in effect re-storing the energy it expended. Let's see if we get a better clue about price's next move after the opening few bars of the next day:
|
 |
| Click To Enlarge |
|
|
The next morning, price gapped open higher, and so now as traders, we have a decision to make: Are we looking for an area to get long or are we looking for an area to get short [Or does this market not interest us at the moment]? I continue to feel this market is in strong down trend and so I am looking for a high probability area to get short this market. I like that price has consolidated, which allowed it to re-store its expended energy, especially because by my measurements, it likely expended 100 percent of its potential energy and needed this consolidation before further down side progress was likely. Now the question is if this current up movement will make it to an area I can define as a high probability area where I'd like to get short? Let's see what the market offers us next:
|
 |
| Click To Enlarge |
|
|
Price retreats a bit lower after the higher opening and early morning rally. After testing the morning's lows, it rebounds nicely and I begin to suspect that price may test the blue slightly up sloping Median Line. Note that I haven't yet mentioned the 1:1 Fib Projection I marked in brown on these charts. This line simply measures the distance of the move from Pivot b to Pivot c and then adds that distance to the low formed at Pivot d, giving us a projection of where price would be IF it moved the same distance in an up move originating from Pivot d. Here's how the simple math looks:
The low at Pivot b was 1182.50
The high at Pivot c was 1193.75
The difference between the two is the distance travelled in S&P points: 1193.75 - 1182.50 = 11.25 points
The low at Pivot d was 1172.00
Adding 11.25 to 1172.00 gives me 1183.25, the 100 percent distance from Pivot B to C added to the low at Pivot d.
I also didn't mention the pink sliding parallels I added, though in many ways they may be self explanatory. After price tested the green Lower Median Line Parallel, it consolidated a bit and then re-tested the lows for the move but failed to make it down to re-test the green Lower Median Line Parallel. I simply measure the distance between where it stopped and where it should have intersected with the Lower Median Line Parallel and then I add that same measurement to the Upper Median Line Parallel. In its strictest sense, this isn't really a case of Hagopian's Rule but let's say that it is a simple measuring technique I've used over and over to project the likely undershoot and overshoot inherent in these sorts of moves. IF price tests the green Upper Median Line, any price overshoot will generally be contained by this projected sliding parallel.
Now the question is: Do I want to get short IF price makes it high enough to test the blue Median Line? Well, at the speed price is unfolding in front of me, it's easy to imagine that by the time the test of the blue Median Line happens, price may also be testing the green down sloping Upper Median Line Parallel. And this Upper Median Line Parallel represents the area where price will likely have expended its stored energy. And of course, we have already highlighted the 1:1 Projection that comes in at 1183.25, which is in the same area. So we have a handful of important lines in confluence, plus this is the area where price should be out of energy [IF price makes it this far]. I will take a shot at getting short this market, if I can identify an initial stop loss and profit target that give me a solid risk reward ratio.
Note that the 61.8 percent retracement from the swing high at Pivot c to the swing low at Pivot d comes in at 1185.50. To get this number, I simply subract the low at Pivot d [1172.00] from the high at Pivot c [1193.75] and find the difference, which is 21.75 S&P points. I then multiply 21.75 times 0.618 and that gives me 13.44 S&P points. I add 13.44 S&P points to the low at Pivot d, and that gives me the 61.8 percent retracement, which comes in at 1185.44. I round that off to 1185.50 and I'll use this very popular retracement level and hide my initial stop above it by three ticks. If price gets that high, it will have broken above the major confluence, expended much more energy than I anticipated it to be carrying and will also have run through a major Fib retracement, where many larger players are likely to have resting sell orders to get short this market.
And the profit target? The logical profit target is at the blue up sloping Lower Median Line Parallel, which initially would come in just above 1172. So we would be trying to get short at the confluence at 1183.25, with a stop at three ticks above the 61.8 percent retracement [1185.50 plus .75 = 1186.25] and our profit target would come in at 1172.25. We'd be risking three S&P points to make eleven S&P points. That's a risk reward ration of over 3.5, which is a nice ratio. This trade does not have as high a success probability as zoom ans retraces, in case you wondered. I measure its general success rate at something approaching 67 percent. But with this high a risk reward ratio, I'll take the trade, if price allows us to get short. Let's see what these orders look like on the chart:
|
 |
| Click To Enlarge |
|
|
Everything looks good and the numbers check out. I call my broker and give him my limit sell order, which will get me short at 1183.25, and the initial stop loss order at 1186.25. Remember: I can put the stop loss order in at the same time, because by the nature of where price is currently trading, it can't get to my stop loss order without first getting me short at my limit order of 1183.25. Now let's see what the market does next:
|
 |
| Click To Enlarge |
|
|
Several bars later, price spikes higher, through the confluence at 1183.25 and filling our limit sell order.Note that the bar just manages to close above the down sloping green Upper Median Line Parallel, but it didn't make it to the sliding parallel I added earlier. I don't want price to hang around up here too long, or I'll begin to suspect price is consolidating or resting before accelerating further to the upside, instead of changing directions back to the trend lower. And don't forget! Once we see our entry price on the screen, we call our broker and check that our order was filled--and then double check that our initial stop loss order is in the market. Then place our profit order at 1172.25 and tie it to our stop loss order by making it "One Cancels the Other" or "OCO." That means that if either of these orders are filled, it automatically cancels the remaining order. Let's see what price does next:
|
 |
| Click To Enlarge |
|
|
The next bar is an inside bar that closes lower, well below the down sloping green Upper Median Line Parallel. I feel a little better about the entry now, but I'm still cautious because this is not my highest percentage trade entry. The next bar is lower as well, though the range has narrowed a bit. And the following bar is narrower still, indicating price is re-storing energy. When I notice that these two narrow range bars have formed a double bottom, I'm feeling a little more nervous again. And then the next bar forms, and although it closes on its low, it is the narrowest bar yet. I look at the chart carefully and decide that if price takes out the high of the day by more than three ticks, I no longer want to be in this trade. Basically, I want to stay in this trade if I was right about price having expended its energy at the calculated level, but I want to risk less as time goes on, because so far, price has given me little to be excited about. This could be coiling action before price makes another leg higher! I call my broker and cancel the intial stop at 1186.25 and move it down to 1185, which is three ticks above the high of the day. Let's see what price has in store for us now:
|
 |
| Click To Enlarge |
|
|
During the next bar, price moves lower and it looks like this is the beginning of a strong move lower. But the next bar climbs back above the down sloping Upper Median Line Parallel and closes above it. Price is still unable to test or exceed the sliding parallel, however, and the next bar partially reverses the strong up move and price closes back below the Upper Median Line Parallel. A move now above my entry level would be above the sliding parallel as well. I call my broker and snug my stop loss up to break even, at 183.25. Let's see what price brings us now:
|
 |
| Click To Enlarge |
|
|
The next bar moves lower but closes near its highs. But the following bar spikes lower with a wide range bar and price closes in the lower third of this wide range bar, also leaving a double top. It's getting late in the session and if price is going to make a move lower, it's going to have to be soon. I snug my profit stop to three ticks above the double tops just formed, so it is now at 1182.
|
 |
| Click To Enlarge |
|
|
The next bar is an inside bar lower, with a narrow range. Following that, price makes a new low for the day. As this bar closes, I snug my stop once again, this time to three ticks above the previous bar's high, at 1180.50. And now I give a "Market On Close" stop order to my broker. This ensures that if my profit order isn't hit before the close and my stop loss isn't hit before the close, my broker will get me out on the close and cancel the other orders. Under NO circumstances do I want to turn a day trade into an overnight position.
|
 |
| Click To Enlarge |
|
|
The next bar makes another new low for the day and closes in its lower third. Once it closes, I snug my profit stop lower again, trailing it back three ticks above the previous bar's high, at 1179.25.
|
 |
| Click To Enlarge |
|
|
The last bar of the day also makes a new low, but we are not close to our profit target of 1172.25. Remember that we are working a Market On Close Stop and that is indeed how we exit this trade, at 1176, for a gain of 7.25 S&P points. Once we confirm that we were filled on our MOC order, we make certain our broker canceled all our other orders. And we make him repeat to us: "You're flat and working nothing."
I hope you all find this trade set up and the trade management details interesting and informative. If you wish to see the trade that preceded this one, that really set the frequencies up for it, click here:
March 23, 2005 Trade Description And Charts
I wish you all a fine weekend!
Act, don't Re-act!
|
|