ES 987T: In order to learn from a choppy market and give examples of what to look for, below is a blow-by-blow look of Wednesday's trading day. We never expect that trading will be perfect, but it's still useful to see how we could have known where a move would end and where a reversal could begin.
Here are the rules used in the series of charts below:
1. Use 1.272 Fibonacci extensions to determine higher high or lower low targets. In a fast moving market, look to the 1.618 level. When the 1.618 level is exceeded, then look at higher time and/or a larger pullback.
2. Once this target is hit, use the initial move off the previous swing high/low to determine pullback amount (a 1:1 move). Once this target is hit, repeat rule #1 to find next target.
3a. Before rule #1's target is hit, use intra-wave pullbacks to give insight into more precise targets (ABC movements, where wave A=C).
3b. If C is not near the 1.272 target (rule #1) and is not a new high/low, then use wave B as a guide for interim pullbacks till target hit.
4. Use breaks of previous swing levels to change bias.
* Note, rules are based purely on price action and don't use ANY indicators!
Chart #1: At the close of Tuesday, we had a lower low and an expectation that it could keep going lower after hours. Using a 1.272 fib ext we have a potential target to watch (rule #1).
Chart #2: Instead of an immediate fall, we had a small rally prior. This rally didn't break the 1051.25 swing high, so we still expect lower lows. Using this new info, we use a 1:1 fib projection to get a more specific target (both blue arrows are equal length). This is rule #3a (from above). This target is close to out original target at 1047 and is a new low. (FYI, The light blue area is overnight trading)
Chart #3: After hitting this 1047.50 target, we rallied hard and broke above the recent swing highs. This changes our bias to "long" (rule #4).
Chart #4: Using the same fib projection technique we get the 1.272 level at 1053.75/1054 (rule #1), which price went right to and bounced off. If this fall goes below 1047.50, we need to flip our bias to short. Otherwise, we try to look to see where a pullback may land in order to go higher (see Chart #5).
Chart #5: History repeats itself, so previous market action can be very telling (rule #2). We are at a new swing high, so we want to look at the previous swing high to give us an indication of how far the pullback could be. In other words, a repeat of what happened previously. Both blue arrows are of equal length.
Chart #6: If we went long off that pullback, where is our target? Using the same 1.272 fib extension technique (rule #1), we have a target at 1055/1055.25. In this case we came to 1054.75 and just missed our target by 1-2T. This is a first sign of the mood changing. However, this is just something to keep in the back of your mind and not something definite.
Chart #7: We have a new high and a pullback, so we want to have an idea of where the pullback could go (rule #2). Looking at the previous swing high, we look at the initial move down as a clue (just like in Chart #5 above). Both blue arrows are of equal size. Again, very close to the target of 1051, short a tick.
Chart #8: Once again, we take a 1.272 fib extension (rule #1) to see a potential target at 1055.75. Market failed to even reach the previous high and had a very choppy move up to boot. This is another sign of weakness and if long, may be good to keep stops tight.
Chart #9: As expected, this weak movement did cause a sell off. Being that two previous swing lows were broken (two red lines)(rule #4), we have to look at the entire move to search for a target (rule #1). Unfortunately, this move down didn't have decent pullbacks to enter on, but we can still look for targets. In this case, it's the 1.272 fib ext at 1045.50.
Chart #10: Due to the time of day (8:00-9:00 am EST) and the expectation of a gap fill (1050.75), this 1045.50 would be a great place to go long on. The gap fill is our initial target, but we let price action give us clues into more precise targets as it unfolds.
Chart #11: Since we have a new low and want to get an idea of an initial target of a pullback, we use the same technique as in Chart #5 and Chart #7 (rule #2). This technique looks as the initial move off the previous swing low, expecting history to repeat itself. This gives us a target at 1051.75 (the two blue arrows are equal length).
Chart #12: Amazing! The open market opens and the gap is filled and the target is hit almost exactly!
Chart #13: Once again, we are getting lower lows and lower highs, so we look for a target using the 1.272 fib extension (1043.50) (rule #1).
Chart #14: As the fall is taking place, we look to the first significant pullback to give us a more precise target (rule #3). In this case around 1045.25 (which matches up with previous lows). Keep in mind, this falls short of our 1043.50 target, but is just something to keep in mind. This 1045.25 target failed to get hit as well as the lower low target! A trailing stop would've been hit and you'd be out, but still a successful trade if short from the 1052 area.
Chart #15: The previous swing high was broken, so the bias switches to "long". Using the 1:1 technique (rule #3), we have an initial target at 1050.50. Being that this target is not a higher high, we can look for another pullback to then go even higher (rule #3b). (See chart #17 below to see the full target using rule #1)
Chart #16: Using the first pullback as a guide, we have a target of the pullback at 1048.75 to then take us higher (rule #3b).
Chart #17: However, before we enter in the trade, we want to have an idea of the target. Once again, using the 1.272 fib ext, we have a target at 1053.50 rule #1).
Chart #18: This 1048.75 was a good level, but it took awhile for price to make its move higher... coming a tick away from the target.
Chart #19: Since we have a new high, we look to the last pivot high and the initial move off that high for our target (same as Chart #5, #7, #11) (rule #2).
Chart #20: Target hit!
Chart #21: If you reversed at this 1048.75 level, you would get a little heartburn and even a retest of the level. However, using the same ol' 1.272 fib ext technique (rule #1), the target was hit!
Chart #22: We have a new high, so we look at the initial move off the previous swing high (rule #2). In this case, there is no clear "initial move" as it was a quick move down with no clear pullbacks. Thus, we are forced to use the whole move as a target with hope that the move down will give us indication of target.
Chart #23: Using rule #3, a small pullback on the way down gave us a 1:1 fib extension move down to 1048.25 (two red arrows). This is just below the 1049.25 target mentioned above. But is NOT below the previous swing low at 1048 and is more like a double bottom. This would be a good place to take profit and go flat.
Chart #24: As mentioned above, this new target was NOT a new low, so we have no choice but to expect new lows until the downtrend fails. A new low below 1048.50 happened, so the down trend is still valid.
Chart #25: So, what do we do when we get a new high/low? We use rule #2 to see what kind of pullback to expect, then use rule #1 to give a target.
Chart #26: We got a double bottom (1047.50), then a rally that would've triggered a trailing stop. However, this break higher switches the bias to "long" and can expect a move to previous highs..
Chart #27: Since we had a bias change, we look for an entry long. Using the first pullback as a guide (rule #3b), we have an entry at 1050 (two red arrows). Since this pullback is so small (6 ticks), seeing a move to the 1.272 level (1049.50) isn't surprising. Also, this 1049.50 lines up well with a 50% retracement of this rally, which is also a heads up. Finally, using rule #1 we have a target at 1052.50/1052.75 (blue arrows).
Chart #28: With a little heart burn during the trade and a return to the entry level, we hit our target (1052.50) and more. Using rule #3, we also have a target at 1053.75, which was also hit.
Chart #29: Zooming out a bit, we see that this high is very close to the high at 1054.50 from earlier in the day. Assuming we hit new highs, using rule #1, we have a target at 1056.50. However, we are at the end of the day, so it is something to watch in after hours trading.
UPDATE: Chart #30: Target hit and more! It went to the 1.618 level to the tick. Using rule #2, we have a pull back target at 1055. (FYI, the overnight session has begun, thus the light blue background has begun displaying. The vertical, light gray line denotes the beginning.)
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