October 13, 2005

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October 13, 2005 Morning Comments: I'm proud to say I leaned on the same green line [with a slightly new twist] and made the tenth nice profitable trade off the "golden line." As I've been telling the seminar traders all week, don't expect to find a line this reliable, with this long a life, very often...But keep going to the well until the well dries up [or the until you run out of metaphors].

As I have been saying all week, the green down sloping Major Median Line has been "calling the tune" and again, nothing was different today. As you'll see on the next chart, a variant of this Major Line again was the key to the day's high probability entry. Although a little thought and a little magic were involved, this remains a truly golden line...

The first chart above chronicles the first nine times price tried to make it back above the down sloping green Major Median Line, once price had zoomed below it. And you can see that every time price tested the Major Median Line, you could have sold the re-test and put your stop three ticks above the prior swing high, which came at the prior test of the same Major Median Line, and never gotten stopped out--and if you were day trading and using anything that remotely looked like intelligent profit targets, you'd have been hard pressed to take out LESS than five S&P handles on the worst day of this run, and it was pretty easy to take more than fifteen handles yesterday. There wasn't any creativity involved [until today's trading]: It's been a nice run of simply selling the re-tests of the same line, day after day, and then booking your profits. As I said yesterday, I know these sound like simple things, but they can be hard to keep in the front of your mind. How many traders are actually willing to sell against the same line the ninth time price tests it, even if they made money the last eight times? Human nature tells us all it cannot last, and so too often, traders try to be the one that "knows" this will be the time price breaks through that golden line--nothing lasts forever, right?

The second chart, above, is the pre-market zoomed-in look, giving you some perspective of where we were yesterday and where we are likely to find overhead resistance and some support below the market. Note that yesterday, we broke below a sliding parallel drawn off of multiple bottoms below the green Major Median Line and actually tested the second sliding parallel, drawn at the same width as the first sliding parallel. These sliding parallels act just like Warning Lines stacked below a Lower Median Line Parallel and they were "tested" when they were drawn, since they were drawn from prior lows from multiple days that were of an equal distance from the Major Median Line. I used these lines yesterday as profit targets, as price sprinted lower, to give me a 16+ S&P handle profit day. Now that you've seen what I showed all the seminar traders before the markets opened, let's see what I can find in the market today!

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Because price opened well below the Major Median Line--and opened well below the first sliding parallel--I needed to find a new place that carried that same frequency IF I wantet to look for a highh probability trade set up, because nothing I had seen so far has shown me anything that looks or smells like a change from a down trend to an up trend. But as I looked at prices during our pre-market trading meeting, it was clear that price was going to open quite some distance away from the "golden line," so I'd have to be creative.

Just by looking at the charts from yesterday, you can see that the sliding parallels are carrying the same frequency as the original Major Median Line--They have the same slope and price has tested them many times and price turned at these tests, both from above and below. So if price wasn't going to give me the original Major Median Line to sell against, I was more than willing to attempt a short entry against the sliding parallel, if I could find a trade entry set up that offered solid risk reward ratios and had acceptable money management stops. Looking at the chart above, you can see I waited for price to approach the first sliding parallel and then once it had tested it, I put orders in to get short at the re-test. This means I was selling E*Mini S&Ps at 1183 1/4. And my stop was simply three ticks above the 1184 1/2 prior swing high, from yesterday, at 1185 1/4. So I my initial stop was two E*Mini S&P handles.

My profit target? Well, my initial thought was that if price got moving, I might see a test of the Major Lower Median Line Parallel, all the way down at 1165 and change...but I decided that because of the holiday, I'd be best served to split my position into two parts and try to take some nice money out of the first portion and then see how the market unfolded before finalizing the profit target on the second half of the position. The profit target on the first half of the position was at 1175 1/2, which would be a test of the 2nd sliding parallel, which had already been tested yesterday. That would give me a nice profit of 7 3/4 handles on the first half of the position. That gave me a risk reward ratio of nearly 3.9, which is very good, so I entered the limit sell order at 1183 1/4 and initial stop loss order at 1185 1/4. And then once I was filled, I put a limit buy order in for half my position at 1175 1/2, and made it "OCO" with my stop loss order at 1185 1/4.

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You can see that price climbed quickly and after testing the sliding parallel, I was filled two bars later at my limit order, leaving me short S&Ps at 1183 1/4. And three bars later price plunged through the profit order on the first half of my position at 1175 1/2. Once I double checked my audit trail, I reduced the size of my stop loss order and watched for further clues about the directional energy left in the market. Note that on the bar that broke through the 2nd sliding parallel and filled my first profit order, price was right at an area of confluence, an Energy Point, and IF price was going to continue lower, it would need to perform now, with further extension to the downside.

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But instead of showing further downside directional tendencies, price congested and then began to head higher. And because this was a holiday and because price had now moved so far past the Major Median Line [and because I had more than ten S&P handles in potential profits on the table at one point], it was time to look at this chart with a more creative "tactical" eye. Starting with the premise that the area of confluence was acting as a magnet, or to be more descriptive, the place where a stretchy cord was tied to the ground, I measured how far price had come from the high of this move [which is the high of today] down to the Energy Point. And then I simply transferred that same distance below the Energy Point, giving me the length of the stretchy cord on both sides of the Energy Coil. As price tried to pull too far away from the area of confluence in either direction, the Energy Coil would act on price, causing the stretchy cord to snap price back towards the Energy Point. And to make the stretchy cord more useful, I simply transferred the slope of the blue Lower Median Line forming a portion of the confluence to a line that ran through both extremes of the stretchy cord, in effect giving me a new set of sliding parallels to work with. And these new sliding parallels should tell me where price should run out of downside and upside directional energy.

Now note that price had come down about the same amount below the Energy Point as it had gone above it when it made the morning's high. Once I saw that, I entered an order to take profits on the second half of the position at the re-test of the lower pink sliding parallel, where the stretchy cord should stop price from moving lower [because it would be out of directional energy]. This meant I was now working a limit order to buy S&Ps at 1172 1/2 and I saw no need to change my stop loss at this point.

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Price was unable to hold above the blue Lower Median Line Parallel and turned back lower. Four bars later, it filled my limit order at 1172 1/2, for a nice 11 3/4 point S&P profit, which translates into $587.50 per contract before commissions. Now that my positions were closed, I was curious: 1) Would price now work its way lower in a thin market, finally testing the Major Lower Median Line Parallel; or 2) Would price turn back higher, stretching and breaking the cord from the Energy Point and making new highs for the day?

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Looking at the final chart, you can see that the stretchy cord held price firmly to the Energy Point and price closed right on the blue Lower Median Line Parallel--directly off the Energy Point. My profit targets may not have been the most conventional today, but then, my entry set up had a little twist to it, so perhaps that set the tone for the day. In any event, it's always good to be a close observer of the market as it unfolds before you. And if you are capable of playing, "What if...?" you often get some very nice results, even if the desciptions of what you were picturing sound a little goofy...

Creativity can be a good thing, as long as you maintain your money management and risk reward ratios. I hope you found this example interesting. And as always, I wish you all good trading!

Tim Morge