Eating The Dog Food

When I read a recommendation about a stock or a product from a so-called expert, I am usually a skeptic. Does the individual believe what was said/written? Does the individual really intend to do what was said/written? If you remember back to my "US 10 Year Notes, What's Next?" blog post, I summarized the situation as follows:

"If I had to bet, I would bet that 10 year note prices will continue to increase, rates will decrease, for the foreseeable future."

The question remains; did I eat my own dog food? Did I take my recommendation/opinion and act upon it? Yes. Returning back to the original 10 year notes post, you will see that price had not retraced into a "C zone" (the turquoise boxes in the second chart of that post which is a 38.2-61.8% retrace of the AB leg).  As I was not sure whether the inverse head and shoulders pattern on the daily chart had put in the B point (a.k.a. right neckline). My only trade option was to wait for the right shoulder/C zone to be hit. And that's what I did.

Looking at the following weekly chart, you will see that price did retrace into the C zone, this week.

Click to enlarge

I don't trade directly from weekly/daily charts, but they serve to find the trade locations of interest. The next step is to watch price on a trading time frame chart and wait for a reversal entry that would initiate the long trade. A trade that may move price into the destination area of this pattern which is the 161.8-224% extension of the XY leg to 129'04.5 - 130'31.0.

The following chart is the December 10 year note on a 610 tick time frame, with the 8, 50, and 200MA, as well as a volume histogram below price.
 

Click to enlarge

The 38.2% retrace that would set the minimum potential right shoulder was 125'26.5 and is drawn on this chart. The swing low was put in yesterday, during extended trading hours and represents point X, during the early morning a swing hi (across 50 & 200MA) was set, then price retraced 88.7% of that swing. Perfect. Here is a reversal pattern, that would take the trade into the direction of the CD leg (long). While the elapsed time to create the XY leg was about 4.5 hours, the retrace took only 2 hours (much faster than XY), and the swing low that created the A point corresponded with a volume spike. Moving averages were in proper location, so a high probability trade set up was available.

The following Tradestation positions window, shows I am long 3 contracts at an average price of 125.83 (125'26.5).

My trade intention is to hold two contracts to the 129 area (minimum target for the pattern). CD legs are generally sloppy, but I have no desire to turn this trade into a loser. My stop is currently break even and will be adjusted upwards with price. Tomorrow, Federal Reserve Chairperson-Designate Janet Yellen testifies on monetary policy before the Senate Banking Committee in Washington DC. This may generate some chaos in Treasury prices. Should ten year notes continue to increase in price, they may not get to the target price before the contract expires. If it does not then I will close this position during the rollover period.

As always, trade what you see.

Same Pattern, Two Different Markets

Today is Veteran's Day, a bank holiday, although the equity and futures market are open, I expected a slow, low volume day. Fortunately, a few minutes after market open, the Dow (YM) and S&P500 (ES) futures exhibited typical coincidental behavior that has become a high probability/large size trade in my trade plan.

Key characteristics of this trade:
1. Both YM and ES have price swings across the 50MA at similar time for their X and Y points,
2. Both YM and ES form an "A" point that measures as a double bottom or double top (78,6, 88.7, 112.8); the measurements between the markets do not need to be the same, merely the category,
3. 50 and 200MA must be positioned such that movement off the A point, toward the B target, will cross the 50MA first, then the 200MA.

The following chart is December YM on 89 tick. This is a smaller tick frame than I usually use, but selected it since I expected a lower than normal volume day.

Click to enlarge

The following chart is December ES on 377 tick. Also a smaller tick frame than I usually use.

Click to enlarge

Two different markets, exhibiting the same patterns at the same time. Watch for these coincidences to occur and track the frequency in which the market movements are aligned. This might become one of your primary set ups too.

Fibonacci Music - Catching The Dow's Bottom

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.

Click to enlarge

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.

Click to enlarge

"Unscrunching" the yellow box, exposes the following picture, a true Fibonacci symphony! 

Click to enlarge

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.

Click to enlarge

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.

Tactical Long in Weak Market

Show a 3rd grader this 240 minute chart of December crude oil and ask him/her if price is going up, down, or sideways, and I'll bet you will get the answer "down." It's not hard to see that crude has been falling since last August. In fact, it is down over 14% during the last 68 days. The best trades are in the direction of the dominant trend, but what to do if you're not in the short trade?

Wait for a perfect setup that meets your rules. Today, a 78.6% "Double Bottom" Fibonacci pattern had the perfect setup. Perfect enough, to force a long trade in this short market. Specifically, the setup was as follows:

A swing low was created around 6:30a (labeled X), price fell hard to that price, consolidated sideways, and then attempted to recover (labeled Y). The movement from X to Y was $0.50 and took 1 hour, 40 minutes. 

• This XY leg qualified as a valid swing since there was an acceptable window at both endpoints.

Price then fell fast and hard to the 78.6% retrace of XY, but did not go below. The drop of $0.39 took less than four minutes. At this moment, I waited for price to close above the eight SMA (purple line) and placed a "buy market" order. The initial target was 36 points with a risk of 9 points (better than 3:1 hurdle).

• The YA qualified because it stopped exactly at a Fibonacci ratio. It was fast and exact. Point B, the 113+ retrace of YA was above the 200 SMA (brown line), at the moment that point A was set.

A "perfect" 78.6% Double Bottom has an initial target at 113-127.2 retrace of the YA leg. It is then expected to retrace 38.2-61.8 percent to make the C point. The probability of the C point succeeding is increased if, when the B point is set, the 38.2 retrace back to A is greater than the 50 SMA (in the case of a long). That condition was met today. Therefore, there was no reason to exit the trade completely.

The expected destination of a 78.6 Double Bottom is the range defined by the 161.8 - 224 extension of the XY swing. You can see that this area overlapped the 78.6-88.7 retrace from the previous day's afternoon high. A good place for shorts to push price down, into the longer term trend.

A perfect long setup, that culminated in a handoff back to the shorts, with risk reward ratios of better than 3 to 1 and 6 to 1. Not bad for a counter-trend trade.

Trading Day Time Frame E-mini S&P Futures In A Consolidating Market

During the past eight trading days, the e-mini S&P futures (ESZ13) has traded in a narrow band. This is a market in consolidation that is "controlled" by day time frame traders ("daytraders"). That said, using Fibonacci patterns and retracements can provide low risk, high probability entries and targets.

One such trade set up this morning after the release of the ISM Non-Manufacturing PMI at 10a ET, 9a CT. It is common for news reaction to provide an opportunity for a trade.

Looking at the chart below of ESZ13, 2584 tick (arbitrarily large Fibonacci number to smooth out natural price noise), North American traders awoke to a 112.8 double top (DTA) pattern well under way. The DTA was set up during the 11/3 RTH session. As with all successful patterns, price should have entered the 161.8-224 extension of the XY leg, and it did. Those ETH (extended trading hours, 4:30p - 9:30a ET) traders who shorted the DTA could have been rewarded with a 4:1 trade.

As of this writing, there was a triple confluence that set up the RTH (regular trading hours, 9:30a-4:15p ET) low as a low risk, high reward trade:
1. Price entered into the destination zone of the DTA,
2. Price hit a 224 extension of a fractal swing (green lines/label),
3. Price hit a 78.6 full pull (across 200 SMA) retrace to the RTH low set two trading days ago (red lines).

In addition to these confluences:
1. Price would pass the 50MA (magenta) before the 200MA (golden brown),
2. The minimum expected retrace of the 78.6 DBA is 113 retrace of YA and that price is greater than the 200MA.

Confluence plus moving average alignment signifies a good trade opportunity.

You will also notice that at the time of this writing, the fractal 224V long, hit its destination. Next area where price may turn down is the 78,6-88.7% retrace - day traders would be expected to attempt shorts here. Finally, notice that the "B" point for the DBA long is around 1766; well within the eight day balance. If price does complete the AB leg then a 2 point risk would return about 14 points, or a 7:1 risk:return ratio.

It takes time to see and then trust the Fibonacci patterns. But, IMHO, it is well worth it.