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| March 29, 2005 Comments: Price has come down quite a ways with little consolidation, so several days of consolidation doesn't surprise me. If you think about the last presentation I posted, featuring a trade from 03/24/05, we got short as price traded higher off of the longer-term support formed by double bottoms earlier in the week. This is one way to take advantage of consolidation: trading WITH the prevailing long-term trend, which to me, still seems to be down. Another way is to identify an Energy Coil forming and then to trade it from either and/or both sides while price re-stores the energy it expended on the prolonged move lower. In the chart above, I contend that the up sloping blue Lower Median Line Parallel and the up sloping blue Median Line are currently acting as the wide boundaries of the Energy Coil, and depending on how price moves after this gap open higher this morning, I'll attempt to take further advantage of this situation, trying to be open to either long or short trade possibilities while price remains within the Energy Coil. Note that I've added a Schiff Median Line that captures the majority of price's action in the past few days. I won't count on this Schiff Median Line set as support and resistance, but instead, I'll use it as a guide to the current direction and potential boundries of price. Let's see what price gives us to work with: |
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Price continues to climb higher, towards the up sloping blue Median Line. Note that the last two bars have left double tops and small details like these, especially near the extremes of Energy Coils, can often be important clues. Also, note that I have marked in two Fib Projection areas: The first is support which is formed by measuring the distance from Pivot 4 to Pivot 5 and then using 61.8 percent of that distance added to subtracted from the just formed double tops. Here's how the math is done:
The high at Pivot 4 is 1184.25
The low at Pivot 5 is 1174.75
The distance between the two is simply 1184.25 - 1174.75 = 9.5 S&P points
To find the 61.8 PCT Fibonacci projection, take .618 * 9.5 and that gives you 5.9 S&P points. Subtract that from the double tops just formed at 1183 and you get the projected 61.8 percent support just above 1177.00
The second Fibonacci projection gives us resistance, formed by the distance from the low at Pivot 3 to the high at Pivot 4 and then adding 61.8 percent of that distance to this morning's gap opening low. Here's how that math is done:
The low at Pivot 3 is 1174.25
The high at Pivot 4 is 1184.25
The distance between the two is simply 1184.25 - 1174.25 = 10 S&P points
To find the 61.8 PCT Fibonacci projection, take .618 * 10.0 and that gives you 6.18 S&P points. Add that to this morning's gap low of 1177.25 and you get the projected 61.8 percent resistance just above 1183.00
Now that we have price "boxed in" with similar 61.8 percent Fibonacci projected support and resistance, and have marked the probable top and bottom of the Energy Coil, let's see if we can make sense of this range and suggest any potential trade set ups within this Energy Coil: |
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| Looking at this next chart, you can see I've outlined a plan for getting long, if price gives us the opportunity. In the next chart, I'll outline a plan for getting short. Here are the parameters for the potential long trade: IF price re-tests the green down sloping Upper Median LIne Parallel, which was zoomed during the second bar this morning, I'll get long at the intersection of price with that Upper Median Line Parallel. I'm starting out with the assumption that the order would be to buy E*Mini S&Ps at 1178. Our initial stop loss would be a move three ticks below the low of the day, which would also be below 61.8 percent projected support I outlined above. The gap open low and low of the day was at 1177.25, so the initial stop loss is at 1176.50. The profit target, if we manage to get long, would be at the re-test of the double top bars just formed, at 1183. This area is just below the confluent resistance formed by the blue up sloping Median Line and the 61.8 percent projected resistance. And of course, the recent swing high offers further resistance, at 1184.25. So in this trade set up, we are risking 1.5 S&P points, for a potential gain of 5 S&P points. This is a risk reward of 3.33, which is more than acceptable, especially since we know the zoom and re-test trades have such a high probability of success. Now let me outline the potential short trade set up: |
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The sell entry point would be the re-test of the double top bars just formed, at 1183. IF we managed to get short, our initial stop would be three ticks above yesterday's swing high at 1184.25, which means an initial stop loss order of 1185. Our profit target would be a re-test of the day's low, which was made on the gap opening higher, at 1177.25. This means we would be risking 2 S&P points and our potential down side gain would be 5.75 S&P points, which gives us a risk reward ratio of just about 2.8, also more than acceptable. And besides having layered overhead resistance above us as protection, I also note again that we are still in a down trend, so this is a trade with the prevailing trend. Those two should help add to the probable success of this trade, IF price allows us to get short.
How will I choose which trade to take? I won't! I'll take either or both trades, should the market let us in, since I believe this will turn out to be an Energy Coil day. I call my broker and give him both entry orders. I'll keep stop and profit orders "in hand" until things get a bit more clear, but I do want both entry orders in the market, in case price makes a spike in either direction. Let's see where price goes from here, now that we have laid out a two-headed plan: |
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| Price makes new lows for each of the next three bars, leaving triple tops in place and closing below the gray up sloping Schiff Median Line. Hopefully, price has tipped its hand and we'll get a chance to get long, But either way, we have orders on both sides in the market, waiting for price to test the extremes of the Energy Coil. Let's see what price does next: |
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| Price continues lower during the next bar, getting us long at 1178. As I see our initial price print, I call our broker and enter our initial stop loss order at 1176.50 and confirm that we are indeed long at 1178. Then I put in a profit order at 1183, OCO [One Cancels the Other] with the stop loss order. And since price has already tested the down side, I also place an additional limit sell order at 1183, so I'll get short IF price gets to our profit target from our current long trade. |
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| For the next ten bars, price agonizingly climbs a bit higher. The bars are rather uniform in range and the slope of the movement is orderly and consistent. But finally on the tenth bar, price does close back above the up sloping Median Line, so perhaps the long wait will pay off in a nice profit. As a precaution, I call my broker and put in the initial stop loss at 1185, in case the market gets us short at 1183. Let's see what happens next: |
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| The next bar is a busy one! Price spikes higher, taking us out of our long position for a nice profit and also getting us short at 1183. As soon as we see our limit price of 1183 print, I call my broker and make certain that we were filled on our profit order AND our order to go short at 1183. Then I cancel the stop loss sell order below at 1176.50 and check again that the broker is working our initial stop loss on our new short order at 1183. And I then give him our profit order, at 1177.25. Even though price spiked higher, the bar closed unchanged, in the lower third of its range and at the moment, we have a small profit in our short position. |
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| Two bars later, price has made two new lows and closes back below the up sloping gray Median Line. As the second bar closes, I call my broker and snug my stop loss to break even. The session is getting late and I have a nice profit in hand already. I like the short position, but if it shows enough strength to get back over the Median Line, I don't really want to risk any profits. Where to now? |
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| The next bar makes a new low for this move and also closes below the Median Line, so perhaps we are on our way to a second profit on the day...Because we are trading in rather narrow ranges, there is little order management we can do, but one thing I do add now is this: As the session continues to move closer to an end, I feel it's prudent to add a "Market On Close" stop order, which means that my broker will take me out of this position on the close, if my stop loss order and profit order do not get hit by the close. Again, my broker allows me to make these "contingent" orders, which means he ties them all together and when one gets executed, he cancels the remaining orders. I know not all brokers allow this and certainly, not all electronic platforms allow this, so if that's the case with the broker you are working with, you'll have to be a bit more "hands on." Let's see how the market is treating our position: |
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| The next bar is a wide range bar lower and it breaks through and closes below the up sloping Median Line Parallel. Price is now near our profit order but the session is nearing an end! I call my broker and snug my break even stop loss order to a stop profit order at three ticks above the high of the prior bar, which is at 1181.75. No matter how the session ends now, we'll end up with two profits from two Energy Coil range trades. IF you can identify the Energy Coils, they can be profitable and fun to trade. Unfortunately, if you cannot identify them [and unfortunately, most traders cannot identify them...], you can get chopped to pieces in these ranges. One key thing to remember: It is a range until it is no longer a range. Let's see what the next bar brings us: |
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The next bar moves lower still, filling our profit order at 1177.25. When we see our price print on the screen, we call our broker and make certain we are filled on our profit order. Then we make certain we are flat. We double check that he has cancelled all our other orders and we make him repeat, "You're flat and working nothing." This is an excellent habit to get into, because it reinforces you to check and double check your position and your working or cancelled orders.
This was a fun exercise in letting the market pick our position for us, once we had set up the potential trade set ups and put the entry orders in the market. I like trading Energy Coils, though it seems I don't trade them as often as I used to. I hope you all find these two examples interesting and informative. If you would like to see the prior two trade examples, which hinge on the same frequencies, they can be found at:
March 23, 2005 Trade Description And Charts
March 26, 2005 Trade Description and Charts
I wish you all good trading!
Act, don't Re-act! |
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