The markets are crazy. These last few days were no exception. Yesterday, at the open, the Dow hit an all time high and then plummeted to end the day with one of the largest daily losses of the calendar year.
Before the traditional market open at 8:30a Central Time (the futures markets are open "24" hours per day), there were several economics reports that had "market moving" potential.
October Jobs Report, Unemployment Rate, September Personal Income, and September Consumer Spending were released at 7:30 a.m. CT. As is always the case before such events, bid/ask spreads increased as traders were not interested in "getting in front" of the news and the investment bank's algorithmic/high frequency trading. Once the news hit, the algos did their thing and created a buying opportunity three and 18 minutes later.
The best opportunities to buy and sell are always "extremes". Was it possible to select where the market would turn this morning? If you believe that Fibonacci patterns are predictive then the answer was "Yes!"
The following chart of the December Dow futures, 60 minute candles, shows that the news release created a bit of chaos. The news candle (sitting on right, lower yellow oval) is large, with long wicks, generally a sign of confusion. If you trade with Fibonacci ratios/patterns, you may have been prepared for this opportunity. 88.7% is a standard Fibonacci ratio for a "double bottom/double top" (click here for details).
There are three yellow ovals on the chart. The lower left is the November 5, 2013 low at 15456, the center high is November 7 high at 15779 and the lower right is today's low at 15495.
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From the low to the high, the market moved up 323 points in two days. From yesterday's high to today's low, the market moved down 284 points in a bit over 24 hours. To determine the "retrace ratio" divide the down move (284) by the up move (323) and you see the achieved ratio was 87.9% (284/323). If the down move was a perfect 88.7% retrace then it would have been 287 points to 15492 (no need to do the math as the purple Fibonacci retrace tool shows the answer well ahead of time). Net, the market "missed" perfection by 3 points. That's good enough for me! And apparently, that was good enough for many, as you can see, as of this screen capture, the market has recovered 50% of the down move (green lines), and did so very quickly which is unusual since price generally falls three times faster than it moves up (more about that at a later post).
It is very difficult to intraday trade (a.k.a. daytrade) using a 60 minute chart. The following chart is the same Dow futures, same calendar time frame, but each candle represents 233 ticks (there is nothing sacred about 233 except that it is a Fibonacci number). Changing the chart to ticks shows the noise within the market. If you are tuned into the noise, you might hear some fine Fibonacci music. The yellow box of the following chart IS the music.
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"Unscrunching" the yellow box, exposes the following picture, a true Fibonacci symphony!
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Looking for price swings across the 50MA (magenta line) finds the XY using the green Fibonacci retracement tool. Notice the location of the 161.8% retracement of XY. It too, is very, very close to defining the market low which occurred at 7:33a CT, only three minutes after the news "chaos" (generally if news will move a market, the market will still be moving in that same direction, five+ minutes later). A 161.8 measurement signifies the potential of a head and shoulders reversal pattern. On this small time frame (233 ticks) we found a reversal pattern that aligned with the larger time frame double bottom reversal measurement (88.7%). If low this is a valid "A" then when price reverses to go to swing point "B" it must: (1) pass through the 50MA before the 200MA, and (2) the potential "B" points (78.6%, 100%, 112.8% retrace of YA) must be higher than the 200MA. Both requirements were met, resulting in a low risk trade entry. As you can see, the "B" swing point was set in the 78.6-100% YA retrace area (represented by black lines and could achieve 112.8% retrace of YA or more), B points do not need to be exact. Then price retraced to a 61.8% C (we expect 38.2-61.8% defined by the red lines) retracement. Further solidifying this pattern is the requirement that the C point (some may call this the right shoulder) is not lower than the X point (or left shoulder). This pattern met all requirements and did move price into the expected destination area, as defined by a 161.8-224% extension of the XY swing, represented by the purple line.
Perhaps you are still not convinced because you can't "hear" the music, there is still to much noise. Let's zoom into the day's low, by looking at a 55 tick chart. The yellow box remains, but now we are looking solely for further proof of "the bottom." Even on a 55 tick chart the pattern and trade entry rules remain the same. There is a saying that price is fractal. Which means that whatever rules you have, shrinking or enlarging the time frame should have no impact.
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After yesterday's strong drop and the chaos following the news announcement, maybe you were still not convinced that this bottom was "THE" bottom to buy. Drop down to a lower time frame to find further confirmation. Fifteen minutes after the low was set, a 78.6% double bottom reversal structure was put int. Same rules, same thoughts. If this low retest is a valid "A" then when price reverses to go to "B" it must: (1) pass through the 50MA before the 200MA, and (2) the potential "B" points (112.8% & 127.2% retrace of YA) must be higher than the 200MA. Both requirements were met, so another low risk trade WAS possible when price closed above the 8 MA. Another "odds enhancer" was the fact that the market was oversold by 40 or more points at this time. While the regular cash market was not yet open, pre-market trading was occurring. A quick calculation of the net change of the Dow 30 components showed that the cash market was indeed higher than the futures market. So either cash had to be bid down, or the futures must move up.
Eighteen minutes after the 7:30a news release, provided another low risk entry. Risking 20 or less points, could have returned 130 or more points depending upon how you manage your trade.
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