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ES 1597T: The ES got a jolt of adrenaline after hours due to Alcoa earnings.  Using the rules posted in the last post, we are forced to look at a higher time frame due to this spike in price action.  The right, blue arrow shows an extension (161.8%) of the left blue arrow (rule #1).  Using the first pullback off the previous swing high, we get an idea of where price will pull back too for the next move higher.  These are the two red arrows.  See next chart for a closer look at this movement. (FYI, the light blue areas are overnight trading.  Thus, this chart shows two days of price action.)

Below is a closer look at the price action and how that little movement (from two days ago!) gave a window to how far the initial pullback could be off this high (red arrow).  As you can see, it was perfect, to the tick.  Then, there was a rally to a double top, then a sell off in the direction of the gap fill.  Typically, we would expect a higher high, but due to the time of day (8:30am EST) and the typical gravitation toward the gap (1053.25 in this case), it is not surprising to see a sell off.  Also, 1065.75 lines up with the 9/29/2009 high, so that also adds confluence.

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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 #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).

 

 

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ES Daily: As mentioned in past posts, sometimes history repeats itself (but in a more compact or expanded way).  In the chart below, the two circled areas look very similar, 'eh?  Even when looking closely at the minor peaks, there is a lot of similarities.  Plus, both look like a head and shoulders pattern.  Does this give a possible window into next week?

It's been said that the week or few days leading up to a major holiday is typically counter the trend the market is in.  In this case, we rallied the last past of last week before the Labor Day weekend.  Does this mean a fall the beginning of next week?  This is in line with day following the circled area!

Good hunting traders! 

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ES 610T: One of my favorite fib ratios is the 1.272 fib extension.  To illustrate how often we see this ratio, see the charts below.  When the market opened Sunday afternoon, we gapped down and hit the 1.272 fib extension exactly (see arrows and levels).

After this level was hit, we filled the gap and hit the 1.272 fib extension of the above mentioned move down.  Then another reversal to the downside.

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ES 987T: Just a couple quick charts showing the movement around the Gap Fill play.  There wasn't much of a gap to fill in the first place, however.

Prior to the gap fill entry, we had a pop off the 1.272 fib extension... right into our 8:30am EST financial news.  In this case, Productivity and Costs.

The actual entry was using the 1.272 fib extension (shown below) to 1008.  Front-running by a tick may have gotten you a perfect fill.  1007.75 was also yesterday's high.  This setup gave you a quick 3 points! 

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ES 987T:  The "Gap Fill" play is a high percentage play, though entry is sometimes difficult.  The best scenario is that the market will trend in one direction over night, then it will be a counter-trend play into the gap fill.  The gap fill's target is the previous day's 4:00pm close.  In this case, it was Friday's 4:00pm close (8/7) at 1007.25 (big red line on the charts below).  

Note: It is recommended to front-run entries and targets by a tick or two to make sure you're filled.  It is also critical that certain other rules be followed to make sure that a gap fill is likely and one should even look for an entry in the first place.  For starters, making sure the YM is not gapping too much (90-100 is too much) and we are in a high potential gap zone and checking win rate for that gap zone (checking the seasonality win percentages of the trade is a good practice too).  Another great resource is the eminiaddict.com rules on "Gap Fade Setups".

Here is today's setup and what points us to a good, long entry to hit the gap fill at 1007.25.  The light blue area is the overnight movement.

The second blue arrow is 127.2% of the first blue arrow.  Perfect entry at 1000.50. 

 

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6E 233T: I saw this on my chart and thought it was a textbook example of sub-waves.  Below, you can see the 5 Elliot Waves form and how the oscillator reflects these waves.  (The waves on the chart are also labeled on the oscillator.)  After wave 5 formed, an expected large retrace happened.  On a larger scale, this 5 wave formation are just "sub-waves" of a larger "wave 3" down.  The blue arrows show the larger, 5-wave movement.  

In this case, the larger 5-wave move failed to make a lower low. You can see the great divergance on the osc as this large, Wave 5 formed.

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$TNX Weekly:  $TNX is the 10 Year T-Note Yield.  I overlayed the S&P Index ($SPX, red line) to show the divergence that occurred at the 2007 top and the recent 2009 bottom pivot.  As you can see below, the 10yr topped 3 months prior to when the $SPX topped in October.  Similarly, the 10yr bottomed 3 months prior to the $SPX bottoming in March.  Perhaps this type of movement can give us some visability in the future?

It is interesting to see the $TNX follow fibonacci levels just like everything else.  By taking an extension of the "wave 1" off of "wave 2" we have a reaction at the 1.382 level and the 2.618 levels.

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Weekly NQ: W2 is approximately 0.618 of W1.  W3 is exactly 1.786 of W1.  We are currently at a 50% retracement of W3.  On to new lows from here?  If so, target of 773 (as shown below). 

Also note that the 0.618 retracement level lines up with the bottom of W1.

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ZB Daily:  Interesting movement in bonds this week.  The movement seems to pointing to new lows in the future.  W4 came just short of the 1.618 resistance, which was also a .382 retracement of W3.

The chart shows the daily movement from the beginning on 2009.  I circled the first touches of each important extension of W1 (1.272, 1.618, and 2.618).  Each had a reaction.

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ES Daily:  Below illustrates a possible bullish scenario that we are seeing on the daily ES.  For a moment, ignore the area that is circled in the lower left of the chart (X Wave) and assume Elliot Wave 1 begins at 761.50 (as demonstrated by the first blue arrow).  W2 makes a perfect 0.786 retracement of W1.  The length of W3 is exactly 2.618 of W1.  W4 has made a perfect 50% retracement of W3.  So far, very textbook Elliot Wave movement.  This would imply a projection of W5 to go to the levels shown in the chart below. 

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ES Daily: Nice H&S formed in the ES.  Today's low hit the bottom of the neckline to the tick (5/18 low of 875.25)!  Time for the neckline to break. 

If we are starting the larger Elliot Wave 5 down, then this could be the beginning of it.  Wave 5 has five sub-waves.  If this is the case, we have witnessed wave 1 and wave 2 (nice 50%-61.8% ret of Wave 1) and are beginning wave 3.  Some Wave 3 targets are below.

The bullish argument is that the recent pullback is merely the Wave 4 of the the five waves up.  If so (assuming we rise from here), some targets of Wave 5 is 1055 to 1167.  See below. 

 

Also note that this 1055 area also cooresponds with the 50% retracement of "wave 3" (on the ES Weekly), as shown below.

 

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SPY Weekly: Taking a step back and looking at the movement of the market since the beginning in October 2007, it looks so clear!  That's very easy to say after the fact, of course.  From an Elliot Wave standpoint, the movement was very textbook.

Around the middle of May 2008,  we made a 50%-61.8% retracement of "wave 1" to make "wave 2", then quickly started the next wave down. See below.

 

 

 

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ES Daily:  As the chart below illustrates, we are still within the fork (even though we are hitting the bottom of it), we are still above the 200 MA (light blue line), and we bounced off a 50% retracement (917) measured from a recent low.  The 34 MA (purple line) is crossing the 200 MA, which may prove interesting in the next couple sessions.

I would love to say the trend is changing, but it's just not proven yet.  I'd like to see that 0.618 level fail, a close below the 200MA, and a close below the fork to really help the bear argument.

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ES Daily:  Still no close above 1/6/2009 high (942.75) and five (!) doji days in a row!  Same question:  Bull flag or trend change? 

With so many doji's, we must ask, why the indecision?  Perhaps it is due to the 50% level we are hitting in the chart below?  (With a target of 526.50!)

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ES Daily:  I'm not a big follower of candlestick formation anaylsis, but four (4) doji stars in a row must mean something.  If nothing else, great indecision.  In other words, Friday through Wednesday each had a candlestick body where the close was very close (if not the same) as the open (see circled area).  

We are also still within the fork and still being contained between 1/6/09 high and the  5/7/09 high.  Is this tight range a bull flag?  Or, are we seeing doji stars before a trend change?  I'm looking for a close above 942.75 or a close below the bottom of the fork to give some insight into which direction.

Remember Thursday is contract rollover day. 

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Daily ES:  Zooming down to the daily ES, we have been following another fork very closely for weeks.  The fork from the weekly is still on this cart.  As you can see, on 6/2, we bounced off where the gray, "1.382" line and the current fork meet.  We also closed above the 200 SMA (bullish sign), then retested it today (6/3).  The fact we tested it (almost exactly) and bounced, is another bullish sign.

 

 

 

Daily ES:  Zooming in a bit closer (still daily chart), we see that the current wave up (right arrow) reacted at the 1.272 fib extension level of the previous wave down (left arrow).  I find this pattern happens very often with the ES.  In particular, on the 987T chart. 

 

 

 

Weekly NQ:  Looking at the weekly NQ, we use a fork using the same three points as with the ES except we put the fork in "modified" mode, which puts the start of the median line 50% down from the peak.  You can see we are revisiting that median line now, right at the 1.272 extension.  This is also the 10/13/2008 high.  Resistance from here?

Lesson

I often like to look at past moves to predict future moves.  On Friday, we had a choppy sideways movement, followed by a late afternoon rally.  The rally we had in the afternoon (right blue arrow) was exactly 2.618x (261.8%) of the rally we had in the morning (left blue arrow).  To the tick!  Also, notice the reaction around the 1.0 and 0.786 levels and a close near the 1.618 level.

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I wanted to give a quick example of why I use tick charts as my primary chart over a chart that uses time.

Friday had a wild close and seemed to really exemplify why I rely heavily on tick charts.  Below is a 5-minute chart which shows the huge run up and then some chop into the close (circled area). 

 

Below is a 15-min chart of the same data.  You can see the overnight data is very stretched out compared to normal trading hours.  This makes it difficult to see the structure of the waves and movement as opposed to the chart above. 

 

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Last night's prediction was right on.  See last post. 

Notes for Wednesday: 

• If price gets that high, expect resistance at 922 (Gann level) to 923.50 (5/20 high), then 936.25 (1.272 fib extension of last move down, see Chart #2).  However, I feel 914 area might be it.  See chart #1 and #2 below.
• Take note of the larger 50% retracement at 895.50 (target of 922.75).
• Support:  24H PP at 898.75.  PIT PP at 888.25.

CHART #1: Below is a daily chart of the ES and I'm looking at the two movements/waves indicated by the blue arrows.  As you can see, this latest wave is 0.786 or 78.6% of the last wave (fib level).  The flip side of this is if our current wave extended higher than the last wave.  See Chart #2 below.

Homework, Lesson

 

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Below is an ES daily chart.  As mentioned in past posts, the right, blue arrow is an extension of the left arrow.  In this case you see the 100% and 127.2% levels labeled in light gray and orange.  The bottom red arrow was drawn from low pivot to low pivot.  Making a copy of this arrow (staying parallel and same length) and dragging it to the top pivot, it pointed to the exact day we would hit the 100% level.  Amazing! 

Lesson

Below is an updated chart based on the fib extensions illustrated in past posts.  You an can see on 4/17, we had a reaction on the 100% level (870) and recently on 5/7, a dip on the 127.2% level (826).  Coincidently, the size of this recent pullback is about the same size as the one on 4/17 (approximately 50 points).

Using the technique described here, we see that the stochastic bounced off the 50% line.  I'm going to keep an eye out and see if we see a new high with some clear divergence on the stochastic or oscillator.  Preferably at the 1.618 level (~996) (if we get that high).  However, it's hard to not want to be short already (swing trade).

The obvious, ascending trendline (blue line) has been tested six or more times so far and must be getting tired. The horizontal red line could be a place where many long-term short traders are hiding their stops. Using techniques from this multi-part article by Timothy Morge. 

 

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I wanted to share a weekly chart of the NQ, which also looks set for a fall.

Notice we hit the top of the fork and the 50% retracement at the same time.  Also, the stochastic has clearly rolled over, and, for those AGET users, we have a false bar down with the osc returning to zero. 

Lesson

Back on 3/26, I was like most people and felt the rally was done and we were poised for a fall.  Being that we are market reactors versus market predictors, we need to be prepared for whatever happens.  The unlikely scenario described in this post put a next target at the 930 area.  Well, we're here.  So what now?  It's very interesting that we hit this area right as bank stress tests are released. 

Due to the extended move down, we can take a fib retracement from low to low.  Below is a weekly ES continuous contract chart, illustrating we are at a 50% retracement, with a potential target at 539. 

As mentioned in the 3/26 post, we are at the 1.272 fib extension of the last rally we saw in late 2008 to the beginning of 2009.  If this 1.272 level doesn't hold, the next stop could be the 1.618 level (995).

We also can't ignore the simple, double-top situation from Jan 2009 that could offer some resistance. 

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I just ran into a trade that was so textbox, I had to take a picture of it... in the form of multiple charts.

After a run up and a fresh "false bar" long, we see a quick higher high with some divergence in the stochastic and the osc (see red lines on chart).  This isn't a trade setup, but merely a heads up to be prepared for the trade setup in the direction of the trend.

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Some textbook AGET False Bar setups with the ES on the 987T chart (my current favorite).  Note: All charts are 987T charts on the ES in the central time zone.

Setup #1 (long):  We have a false bar "long", so we are waiting for a pullback to buy.  We see a stochastic pullback to the 50% line (blue arrow), then a new high with some signs of divergence in the osc.  These are signs that we should expect a pullback soon.  The next chart shows a prediction of where the pullback could go to.

Below are a couple targets for the buy based on the hight of the left blue arrow.  The stochastic is overbought and there is much divergence in the osc, so this is definitely a good time to get out of the long.  It's not shown in the chart, but the price hits the MOB right in this area as well.  The divergence is so large in the Osc that we have a nice "Type 2" setup as well, if you are daring to go short.

 

 

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Today (2009.04.28) had many textbook setups that gave some great learning opportunities in the ES.  This is a very long post, but I feel it contains some valuable information!  Note: all times shown in charts are CST and are using a 987T chart.

Below shows the market action near the regular trading hours open.  We can draw a fork from the lows and using the first pullback that gave us a full high to low swing on the stochastic.  Market then confirmed this fork by bouncing off the lower line of the fork (circled), so we have higher confidence that we can trust this fork to work in the future. 

 

 

The leg up (labeled "A") gave us a new high with divergence in the oscillator (green histogram below with red line showing divergence).  Since we had a pullback (labeled "B"), we take a fib extension to see where leg "C" will come in and THIS will be our place to short for a larger move.  You would think that it is preferable to also hit the top of the fork, but since we are seeing (and wanting) a weakening market, it typically doesn't.  Again, this type of counter-trend setup is discussed in this article.

 

 

 

This extension marked the very top of this move (to the tick!) and began to fall.  Since we stopped at the 1.0 level (858.50), it means wave "C" was 100% of wave "A" (they were equal).  The oscillator continued to show divergence with this new high and the stochastic quickly started turning over. 

 

 

Now that we started falling, we need to take a look at some targets.  The first leg down gives us our first indication.  We take a fib extension of this leg (left, purple down arrow) and see price come in at the 1.0 and 1.272 levels (identified by blue arrows).  The stochastic is also showing signs of divergence with that new low, so this might be a good time to take some profits (or exit all together).  Plus, at this point we are in "chop-time" or the "mid-day doldrums", so that's added reason to be defensive.

 

 

 

If that divergence turns into something, where could it potentially go?  We first add a fork (as shown below).  We then take a fib extension from the most recent pullback (small, left purple arrow).  We take note where these levels cross our fork. 

 

 

 

The first area caused some conjestion, but not enough to make it continue the fall. Note, the next level up is at 857.75.

 

 

 

Now that we have our first pullback in this move up, we can take a fib extension from it (both purple arrows are the same height).  Note the 100% level is right at 857.75, the top of our fork, and the level we noted above! 

 

 

As expected, right in the area, price fell off. 

 

 

 

Since we are in the middle of "chop-time", it is a dangerous time to trade.  However, there is still some method to the madness, as price bounced around in this fork. For context, the circled area was the first sell mentioned in the above chart.

 

 

 

Below is the same chart as above that has the addition of a new fork and the formation of triangle with a slight upward bias (the bottom line has a steeper upward slope compared to the descending line).  Also, note the stochastic has a similar wedge formation.  Finally, notice how the bottom line of new fork crosses the top line of the old fork right where price meets it.

 

 

 

And then the pop!  Ususally when you see a wedge like that forming, it is building energy and has a pretty substantial breakout of that wedge (as shown below). 

 

 

 

Below is one way to identify where this rally would go and a good place to short once again.  The stochastic didn't start to show any divergence until it reached this 1.618 extension level.  The fib extension is an extension of the first red arrow.  The choice of how to draw the fork is a tricky one. 

 

 

As the sale continued, we retraced to where the median line and the 1.272 level crossed (see second circled area).  This would be a 2nd opportunity to get in if you missed the first entry to short.  

 

 

This pullback also gives us an opportunity to take a fib extension and look for some targets (see first purple arrow hidden by the price movement).  You can see we re-entered the fork from earlier (dark blue lines), so we have to be aware where these fib levels cross this fork.  These levels act as an additional level of support.  You can see the market reacted at each of these fib levels (pointed out by the blue arrows).  

 

 

 

The final minutes of the day just bounced around in the bottom half of the fork and never really fell below that 2.0 fib extension (851).  However, those final minutes seem to be forming a descending wedge, so I wouldn't be surprised if market continues to fall when the market re-opens. 

 

 

 

I hope you found this information helpful.  Good hunting traders!

 

 

 

 

Lesson

I noticed a recurring counter-trend trade setup that has worked very well for the past 6 months or so (perhaps more).  This was noticed on the ES 15min chart, using only PIT data (8:30-15:15 CST), but 24 hour day may work well as well.  The following chart shows 3 setups over the past week and a half.  This setup makes use of the eSignal AGET "False Bar Stochastic" tool, so you must have it in order to fully make use of this setup.

In the chart below, you have a False Bar ("FB") showing "long", then a minor pullback where the stochastic pulls back to the 50% level, but not all the way to the oversold area.  Next price makes a new high.  Best case, the FB goes away and a fresh 2nd FB appears.  Also, best case, you will see divergence on the stochastic when it reaches the new high.  After this new high, a significant trend change!  (As of this writing, the afterhours data is trading at 846.75 (down from the high at 868.75), so that third setup also worked very well).  See 2nd chart below on how to determine how high that second high may go. 

The chart below is a zoomed in view of the 1st (left) setup.  The wave up had 3 sub-waves.  Taking a fib extension of the first wave up, puts a target 1.272.  It's best to wait for divergence to form on the stochastic to see which extension price will stop at.  After, you can see a significant gap down.

 

Lesson

As I am becoming reacquainted with forks, I am seeing some interesting setups.  Below is a weekly chart of the ES (starting at the Oct 2007 high to present) showing we are at a median line cross of two forks.  On the downward fork, I added the 2x and 2.5x extensions of the fork (labeled on chart), which lines up well with recent lows we've seen.  The stochastic and oscillator are also looking like a bearish setup.

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