I posted the following post at my blog site on Sunday afternoon … it is LARGE and is primarily an educational post. With that pre-warning, readers can advance if they wish …
As mentioned on my Afternoon Trading Plan blog post on Friday, I was busy with other things and did not really follow the market that closely or trade at all.
However, when I went back and looked at the SPY from Friday, I see plenty of examples of Trading Edge created using the trading tools I have been teaching everyone the past year since I started my blog.
Here is a "clean" picture of the 3-min SPY chart from Friday ….
Do the spots that offer readers of this blog Trading Edge jump out at you? If you can't see them, you need to study harder, and start using the tools I provide you in real-time yourself … once you start doing that, they will become second nature and easy to do quickly in real-time.
I'm going to try and quickly list/show the approximately 20 spots where I think readers of this blog should have had a Trading Edge …. here we go!
1. Before the Day even started
Before the trading day started, readers had an edge on other traders by having a "good" higher time-frame view of the market. No one "knows" where or what the market is going to do before it does it, but with our bigger time frame work, we knew that a potentially major resistance area around the 78.6% retracement level for the decline from Oct 27th – Nov 25th was right above the indicated opening level for the SPY (opened at $126.12).
Add to that level was the Control Bar values that we could identify by looking at Thursday's late day price action and Friday's pre-market action. Here is the 3-min chart I posted pre-market on Friday …
So based on importance/significance, we know that the 78.6% level was a BIG number … I have talked about how the 78.6% level has been important for symmetry for the market's moves the past several weeks. If price could get above that level and show "acceptance" then that would be the "all-clear" signal for price to reach for our upper Wave 5 targets. If price failed to get above that price, traders would "know" that a bigger retrace was likely.
In terms of Control Bar Values, the Thursday high was going to be important if price failed to get above the 78.6% level … it would be the market's first line of defense. How price acted at this level would tell you the odds of the next move.
By that I mean if price failed at the 78.6% level and then pulled back into the Control Bar Value, price could have found support quickly and bounced hard. If it did that, traders should have had their confidence increased that price wanted to go higher. Knowing that, traders could be more aggressive buying pull-backs at or above the Control Bar Value.
If price did not bounce quickly/hard off of the Control Bar Value, traders should have been wary of taking long trades at or above that price level.
If price bounced weakly, aggressive traders could have even played for a "failure" of that level and possibly an extension to the downside retracement. I say aggressive, because our bigger time-frame scenario was that wave 5 was possibly just starting so any short trade here was counter-trend and therefore more risky.
Here is how those levels acted …
Most traders had no clue going into Friday those levels and what they meant … the average retail trader was playing catch-up since last week and the Friday morning payroll number was good … the market has to keep going higher!!
2. Opening Gap Higher
Most traders have trouble trading higher opening gaps … I have a pretty standard way of trading these. I wait for the first pull-back, and I use a Continuation Pattern grid to buy … typically as price crosses above the 61.8% level or in the GAP (between the 78.6% level and the top of the grid).
Now everything is connected, so traders who preferred to pass on this possible trade because of the close proximity of the 78.6% level were perfectly in their rights … however, no one knows if that 78.6% level will slap down price. The SPY could have blown right through that level and kept marching higher. So even a prepared trader knowing of the possible resistance at $126.45 could have taken the long trade here with full knowedge that it could fail fairly quickly.
So price signaled prepared traders that it was ready to continue higher … what happened next?
So for traders who took this Continuation Pattern trade and were "prepared" would have taken 1/3 to 1/2 of their position off at the first target. This level was also around that bigger 78.6% level, so traders should have been more aggressive with their stops here.
I normally bring my stops up after that first target is hit, to either the Pattern's 61.8% or 78.6% level or the break-even spot for the remaining shares … it depends on the stock I am trading, how the market is trading, my bigger picture etc. This is especially important early in a trading day since you often get key reversals in the first hour of trading (i.e., a potential HOD or LOD is put in and price reverses). Add to that possibility, was the 78.6% resistance and a prepared trader would have raised his/her stops.
So assuming traders are still alive on their last 1/2 or 2/3rds of their position, where is the "prepared traders" next source of Edge?
3. Retracement Grids
The average trader has no idea of what levels to look for when price does its retracements. Prepared traders always measures levels to see when price has increased the odds that it has "proved" that it is going to do something.
Here is that grid that traders should have slapped up when price showed that it was finding some support … remember that these charts are 3-minutes. There is lots of time for traders to notice potential levels and the need to draw retracement grids.
So we have our retracement grid up … the key level as usual is the 61.8% level. If price can get above this level and be "accepted" then price has increased the chances that at a minimum it will retest the HOD and likely (since the day had just started) that it would break above the HOD. That break would then set-up a bigger failure or "proof" that price wanted to go higher.
If price failed to get above the 61.8%, then prepared traders would know to expect at a minimum a second leg lower before price could find possible support for a move higher.
So it looks like price wants to try and make a 2nd leg lower … how do traders know where that level will likely be?
4. Wave Projections/Retracement Confluence Areas
Once traders have an idea that price wants to make more than just a small pull-back before moving higher, they should get prepared to look for an area of support that could set-up their next long trade. If a trader was short here, he/she would use this analysis when looking for a target zone to cover their short.
So as noted in the chart, traders can project out a ending zone for the pull-back. the areas I use are 1.270x and 1.618x or simple ABC corrections and 2.618x for a complex/extended ABC correction.
Those projections by themselves work fine, but I like to where applicable, use a retracement grid applied to the last wave structure to hopefully see an area of confluence that price is likely to find support.
Again, traders don't know where price will find support but by having these levels up, traders will know "where" to look for possible support/reversal action.
So price sliced through the first area of possible support … price can often extend slightly through a zone, but you will normally see some congestion in the candles as it slightly extends beyond the zone. In Friday's case, price sliced through with big range candles. In other words, price looked like it was in a hurry lower.
This is a good example why traders shouldn't just buy blindly at levels of expected support … AGAIN NO ONE KNOWS WHERE SUPPORT WILL ACTUALLY COME IN … we should just monitor levels and wait for "evidence" that support is being found.
Price came down and made a low of $125.61 … just above the start of the SLOT area ($125.60 / 50% level) and the projected extended ABC wave target of $125.58. Again, I want to point out to readers that these areas are just that … AREAS/ZONES. Don't get hung-up if price misses by a few pennies … keep your eye on the big picture. Does the pattern look right? Does it look done?
In our case, price pushed really hard and bounced off of a suspected level … to each his own, but price hasn't proved to me anything yet. A real reversal area will show that buyers and sellers have had a "discussion" … that will take at least a few candles.
Now price does on occasion bounce hard and reverse in a "V" like pattern. Those are the exception though, and I am not interested in trading the exceptions. I want higher odds than what may occur every once in awhile. I would never take a hard bounce like the one above as being a good risk/reward trade.
I pointed out on the DI indicator what I like to see on an area of possible support area … I like to see the -DI indicator to make a lower high and then break the swing low between those highs. That tells me that price has stopped going down.
If I also get a higher low in the +DI indicator (the green line), that tells me that not only is the down pressure done (red -DI indicator), but price should/will actually bounce higher. I want to get long when I get both … confirmed that the price has stopped going down and that it wants to go higher. I don't want to buy a support area that is just going to chop sideways.
So, the DI indicators gave the "trigger" to get long to try and see if this bounce will work. If I was hawking this and went long here (say $125.86) I would put my stop just below the low of the day (say $125.57).
This is not a bad trade … the upside if the trade worked was back to at least the HOD or $126.50, and possibly higher. That gives us a ratio of $0.64 / $0.29 = 2.21x.
The key to this trade though is the 61.8% level … the stop can be tightened if price shows more than normal resistance action around the 61.8% level.
Again, traders don't know where support will actually be found … all you can do is follow your trading rules and execute what are normally the high odds trades.
All good set-ups do not work out … price pushed hard through the LOD showing that the double bottom was false. That tells traders that next potential bottom will need at least a couple of retests before traders in general are offered a real good trade higher.
So where can we look to for the next possible area of support … remember that price had not really made it into the SLOT support area. That area may still be valid so we should look at that area again.
Also, the bounce off of the last low gives us a wave to measure and project to a possible support price …
The push below the prior LOD sets up a 5-wave looking structure off of the day's HOD. The projected ending zone for this new push lower is still in the SLOT and actually brackets the 61.8% retracement level.
Price actually overshot the projected target zone and the 61.8% level. More importantly, the DI indicators made new highs/lows. In my experience, that is telling us that odds are high that this bounce is not going to give us a good risk/reward for a timely trade. The level may end up being ok and infact the LOD, but it is going to take time to prove that and at best we will be in a sideways-type price chop … NOT A GREAT SET-UP.
So price made a choppy bear-flag looking move higher off of our new potential bottom. It failed on the first attempt of the 61.8% level and on the second test, it cleared the actual price but could not hold above that level. The big range candle lower off of the 61.8% level was you signal that price wanted to at least test the LOD again or potentially lower.
Price makes patterns with its waves … I always try and figure out what the wave pattern is, as that allows me to project where it could go. that helps me pick better profit taking areas and areas to look for support.
What does this pattern starting to look like? We had a 26-bar long, 5-wave move lower and then a 26-bar long bear-flag correction … to me that looks like the "A" and "B" of a 3 or 5-wave structure lower. So prepared traders will project the target for the end of wave 3 base on the length of wave 1 …
Traders were wise to let the afternoon trade (post 2pm) unfold to see if price would make it down into the projected zone. Getting bullish before the weekend is not a high odds trade with all the Euro meetings scheduled for next week.
So price did end the day at the projected price zone, which was also support from late Thursday.
5. Volume Weighted Average Price
Many traders pay little attention to the VWAP during the day … I find that with so much maching driven trading, the VWAP (pink line) price level is a good filter for traders …
6. Opening Range Trading Strategies
This blog is already setting a land speed record in size, so I will keep this point brief. The Opening Range Strategies that I teach could have been utilized by themselves on Friday or the important levels could have been used to confirm other measurements that traders were implementing.
Suffice to say, I find these Fibonacci levels very useful as key resistance/support levels throughout the trading day … a definite TRADING EDGE.
7. Contraction Patterns
Here are the contraction patterns that I like to trade that were presented themselves on Friday afternoon …
I cover how to trade these Contraction Patterns with my blog and on StockTwitts/Tweeter during the day so in the favor of trying to end this blog asap, I will leave it at that for these patterns …
So there you have it … no trader can be expected to be focused 100% on one stock or ETF during the entire day for the entire day. What I hope to have pointed out is that traders should use their Trading Edge when ever they can apply their tools to the price action.
As demonstrated, there are 23 charts on this blog, making roughly 20 spots during Friday that a prepared trader can use his or her knowledge to gain an advantage over the unprepared/unwilling to learn retail trader.
Cheers and talk to later Sunday night for the Monday Morning Outlook …
Leaf_West (blog.tradingwithleafwest.com/)
