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I personally love trading pivot points.  They are a great leading indicator (you know exactly where they are at the previous day's close).  How I like to think of pivot levels is like a rubberband.  

If you hold a rubberband between two fingers, this resting state would be the PP.  As the market moves to S1 or R1, this rubberband gets pulled back.  The market wants to return to center, it wants to return to the PP, tension is formed, which is why these levels often act as sup/res in the direction back to the PP.

However, sometimes, when the market gets momentum and starts hitting S3, S4, S5, etc. the rubberband flat out breaks and there is no longer any pull back to center. 

Its important to be aware of when this rubberband breaks and to go with the trend!

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ES 60 min -  Last night, the ES hit resistance and had a sizeable pullback (about 10 points).  Using the normal fibonacci retracement method you would select the high and the low and look for a retracement.  Below is that chart.  Notice the movement didn't quite hit the 52.8% pullback.

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There are a lot of articles about the "Golden Mean" or the "Golden Ratio" found in nature and in the stock market.  This ratio is 1.618.  This reciprical is 0.618.  If this level is so important why is 50% used so often instead?  Below is an attempt to explain "50%" in the world of 61.8%.

Below is a typical range from 0 to 100, with the 61.8% level indicated. 

If you take 61.8% of the range from 61.8% to 0, you get 38.2% (which is another common fib level). 

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I've never seen the typical fibonacci retracements used this way, but I've found it to be very powerful.  The typical use of a fibonacci retracement is to take a measurement of an existing move's high and low and look for percentages of that move.  Instead, look at the move SO FAR and determine how it "fits" within a larger set of fib levels.  Then, use this to determine where the next support and resistance levels could be in the future.  Think of it as price climbing up or down a ladder.

OIL Daily - The following series of charts is of OIL on the daily.  This may not be the best example, since the recent move was parabolic, but regardless, it's interesting to see it still move technically.  Back on 2/18, if you thought OIL was going to go up, you could throw the following fib levels on the chart.  All I did is select the bottom of the move and make the bars "fit" neatly within the fib levels.  In this example, the 2/18 fit nicely within the 52.8% and 78.6% levels.  There is nothing special about 25.34 other than it was where the levels seem to fit so far in the move.

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Today was a truncated session due to President's Day, but that doesn't mean we didn't see some interesting movement.  Using the same levels as described in Part 2, below was today's chart.  After bouncing around in the levels in the 1337-1342 range, the bottom fell out.  As you can see, there was a big gap in support levels, so it's not surprising that once 1337 gave way, we had a lot of room to fall.  The blue arrows show areas of support and resistance.

UPDATE:  Soon after the market opened at 5pm CST, the market hit that 1327 area. 

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Continuing with the idea of looking at confluence between certain "units of movement", the chart below was made at the close of yesterday (close of 2/17 for 2/18 trading).  I set my script to use "tomorrow's" HLC, and PP based on the day that just concluded (for 2/18 day's trading).  This gave the following levels (red lines).  My thought was if we got down to the 1334-1335 area, it could mean a long up to the 1342-1343 area (indicated by the long blue arrow).  If we got extra bullish, perhaps up to 1345.  Otherwise, if we got below 1328, it could mean a pretty painful day (red arrow).

The chart below show the same levels as above, but with today's price action filled in.  As you can see, we came very close to that 1334-1335 area and made it up to the 1342-1343 area (see blue arrows).  If we had more day, it looks like it wanted 1344-1346.  Interesting. 

Here is another view looking specificly at the range from yesterday's High to Close (red arrows).  As you can see, the movement went from a low at -1 unit, then up to +1 unit, then back to center (and more).  Interesting. 

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I've been playing with the idea that the market moves using a particular "unit of movement", which changes each day.  Some days it seems looking at the range from the Previous High to the Previous Close, then drawing lines using that range often gives support and resistance levels.  Sometimes it's the Pivot Point and the Close, or perhaps the entire High to Low range.

So, to help in this analysis, I built a tool.  The chart below is yesterday's (2/17/2011) ES, 15 minute chart.  The light blue background is overnight trading.  You can see the range from the previous day's High to Close by looking at the red arrows.  Using this "unit of movement", I draw additional lines, which are all the blue levels.  Half-units are the thin lines.  All the small, blue arrows show areas of interest where there was support and resistance from these levels.

You can see the buttons on the bottom of the chart, where I can easily change which levels are drawn.  In this case you can see the "H" and the "C" are highlighted, showing that the levels are using the High and Close range.  (scroll down...) 

So, this is dandy and all, but we have computers to allow us to do more.  So, I took it one step further and had the script calculate all levels for all combinations of selections (H-L, H-C, H-PP, L-C, L-PP, etc), then had it look for overlaping levels.  This still produced a lot of levels, I had it trim down a couple more times and came up with the chart below (same day, same chart).  The red lines are the levels with the most overlapping levels using the method desribed above.  Interesting! (scroll down...)

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6E Daily: This setup has already occurred, but it was a very technical setup that is worth noting. Using symmetry, the previous pullback gave us a very accurate prediction of where the next pullback may go.  Both blue arrows are the same length.  Also, the AGET stochastic setup was also perfect (red arrow).

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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?

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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