Sometimes the charts get busy. I don’t recommend cluttered charts. Simple is always better. Sometimes I have a chart that solely has the mean and Algo trigger. Then I switch the trendlines on and off. That is a nice software feature to have. Otherwise, have a separate chart that marks lines and wedges. Maybe you put your key horizontal levels on another chart. For sure, have a chart that focuses primarily on the mean. The mean is the center of our day trading universe. It helps you isolate the issues.
Notice a lot of my charts are black and gray. The yellow bars tell me it is an outside bar, and the green tells me it is an inside bar. But again, I keep it simple. Too many colors, too many lines, and your brain gets scrambled.
On the chart above, I isolate the opening range, mean, and measured move. If anything was a heads up this morning, it was the bull surprise bar that closed above the mean. The safest move is to buy the retest of the mean break. It came not long after. The small pullback trend got so strong that it stayed above the Navigator trigger line all morning. The trend ended on a parabolic wedge. The faint lines are the K-Bands set at two and three ATRs. When you tag the outside band, it is a safe bet that you are overbought.
But you had additional help as well. You had a measured move target from the opening range, which is precisely where the trend ran out of steam. It would be best to have a target when you are at new, all-time highs, as there may be nothing but blue sky above. Here, we had that upper channel line on the daily chart but were still just short of it. And in the scheme of things, today was nothing to write home about anyway. Note that the scale looks big above, but it is only a 15 point range on the day.
How to project a measured move can be as much an art as it is science. Some measure the first 30-minutes or hour. I guess I know it when I see it. I prefer to mark the morning turns, usually occurring in the first 30-minutes, but the break of the top or bottom of any wedge reversal marks a range to project. Try to isolate the consolidation. I like to be conservative, so I often exclude most of the tails. To me, there was no clear breakout until we cleared the top of the morning wedge reversal today. I projected that range, and that is where I sold. I marked where I bought below.
Let me briefly mention another point. More money has been lost in trading trying to catch the first or last 1/8th of a move than most traders make in a lifetime. We are here to make money. There is no perfection. Don’t be too greedy. Don’t be afraid to sell or buy a little bit short of the measured move. At the very least, tighten up your stop.
I published the Mid-Day Update today just as the micro bull channel was peaking. I sold at the wedge tip into the measured move. But you had a double top soon after. And don’t forget that wedge reversals often morph into head and shoulders reversal patterns. With a little imagination, you can see one on the chart above, and that measured move projected the afternoon low.
This is also a good place to mention that many patterns are imperfect. Don’t expect perfection. Wedges, heads, and shoulders don’t have to be perfect to be valid. These are just another form of triangles and trading ranges, which are consolidations before the next move.
On any trend day, you expect some profit-taking into the close. And when a minor pullback, bull micro-channel finally breaks down, you expect the first reversal to be minor. Here, we had gone more than 20 bars before a trip to the mean. The rule is that the first trip to the mean after 20 bars above it is good for a long trade, even if it is a scalp. The reverse is also true on the short side. The 20-bar rule trade was my last trade of the day.
I tried to mark what might have been an afternoon trade. I am not so sure it would have been clear at the time. Bull and bear traps often show up around the close, and that is why I rarely trade them. There may be some poorly positioned longs at that end-of-day trap. We will likely have to deal with them in the morning.
When you see those large candles with a mix of bull and bear and lots of tails in both directions, those are limit order traders. They short the close of bull bars or a couple of bull bars, and they buy the close of bear bars. That is the opposite of what typically works. Those are hard areas to trade, so I generally don’t participate. I sat out the morning wedge and the afternoon wide range with a bear tilt. By the way, the afternoon drive into the measured move low still qualified as a three-push wedge – even though it did not have the perfect wedge “look.”
Remember that something that does not look perfect or even looks micro in the 5-minute time frame can look a lot more perfect in a higher or lower time frame. You have to have imagination, which comes with experience.
Speaking of experience, here is the Navigator Algo on the 5-minute time frame. The labels reflect the system status at the close and change throughout the day.
Note the “SOB” red label at the peak where I sold. “SOB” means super overbought. Note the trigger line buy and sell signals. Note the volatility squeeze (grey, yellow and red dots on Navigator ATL). The red and yellow arrows are heads up, but the trigger break sets the buy or sell signals. Also, the relationship to the mean can dictate whether the signal makes sense from a risk/reward perspective. I like my potential reward to be two times my risk to stop. Note the momentum divergence on the lower oscillator at the peak. I always have this open on a separate screen. It works nearly as well in a 5-minute time frame as it does on the daily chart.
But having authored and programmed the algorithm, I almost don’t need it. I can see the issues unfolding on an uncluttered chart by focusing on the mean and trigger line.
On a completely separate note, you will begin to see changes to the website this week as we move into a membership-only site. What will be exciting is the new trading room and trading notes. I will trade live once a week. For day traders, I will have a running page of my live notes. Videos will be coming soon as well. These writings involve too much typing for a two-finger expert like me. Don’t register or do anything until you are directed.
By the way, I like the potential cup and handle formation on the XHB (Homebuilders ETF). The ETF has been consolidating since May. Rotation anyone?
Financials have a similar pattern and status:
Now, a cup and handle pattern is not a pattern until it breaks out. When you realize that nearly 80% of breakouts fail, you don’t always want to be first in line. But the way price tends to fly these days; you could miss the move if you wait too long. Ideally, you buy a retest of the breakout if you get one. You can also shoot for a small, lower-time frame pullback after the break.
Here is why considering these potential “swing” trades makes sense. The measured move is double the size of the cup. On the XLB, the projection is 8 points. On the right call option, that would be roughly $600 per call. On the XLF, the measured move would be about $300 per call. Note that you rarely get a one-for-one return on calls for each point gained. I usually get roughly 70%. Volatility and time decay affect option pricing as well.
At the money XLF September 17th monthly calls are only $54 each at the close today. The complete move won’t happen overnight, but that is a six-fold return even if it takes a month. Similar expiry XLB calls are a bit pricier at $175 per call, but the return is still 3.5 times the investment.
I will send an alert tomorrow if we give these a go, but consider this a heads up.
A.F. Thornton