This is part II of the lesson I begun last week about using different techniques and tools to identify low risk/ high reward areas of entry way outside of an established trend.
Click here for the part I: http://chalannn.blogspot.com/2014/02/finding-entries-outside-established.html
To be clear most of these examples had some help from their weekly charts being in an uptrend or had violent drops exhausting all selling.
Some examples will be more art than science, the idea is to identify long trades when the markets seem to be offering zero long trades inside panic or the patterns on the monthly and weekly charts don't support your bullish bias yet stocks bounce and even retrace back 100% Their big drops as was the case during the first half of February 2014, This lesson was inspired after analyzing how the SPY Was able to bounce inside an area of no clear support, retracing nearly 6% and what clues did it offer to identify future opportunities.
One very critical concept one (you, me) must understand and believe is that as an strictly technical analyst, fundamental analysis means little until it does, in 2012 AAPL Had a power up move that has being analyzed on the lesson: the monthly chart part II.
During the length of said up move, some times it had controlled and some times it had violent pullbacks and every time AAPL Kept pivoting higher as it was making new all time highs during all that time so it needed to form its own support in areas where was none, either in the form of 2X bottoms, higher low pivots, etc. And kept moving higher until it reached 700$.
Because AAPL Had a solid fundamental reason to move higher as it was introducing great products and such, I guess.
In 2013 Stocks like VJET, DDD, ONVO To name a few had parabolic moves on pure speculation and dropped,
In the year if our Lord 2014 They haven't being able to go back to their highs seen in 2013 so I gather all three had no fundamental reason for their parabolic move.
Basically strong stocks and ETFs create their own support where there is visible none in the charts so pay attention to 2X bottoms, W bottoms, 3X bottoms, higher lows, higher opening gaps, breakdown failures that trap the shorts, long bearish consolidations that fail to breakdown, or any other signal that obviously interrupts the down trending cycle on the time frame your looking at, in this case the daily chart.
I separated and highlighted the Fibonacci grid into three zones, be VERY AWARE that the deeper price falls inside these grids, the more price will need to form longer bases to bounce back to the highs. The upper 37% I call it the green zone to look for entries, the smaller the drop the better to continue moving higher as it shows no sellers.
The next lower level 26% or from 63% to 37% I call it the yellow zone, where one can find entries but some hard evidence of price reversing is necessary such as multiple narrow bodies following a big drop or a clear double bottom signaling the possibility of price moving back to the top.
The last level under 37% to 0. I Call it the red zone and chances are low of finding long trade entries unless supported by big support on the bigger time frames TFs, multiple narrow bodies following a big bar or a clear double bottom.
The chart above displays three different time frames of the SPY.
I separated the time progression of price on a blue box of a whole week of action from the weekly, daily and 60 minute charts during a 15 day period.
On the top half of the chart, the weekly chart had a violent drop but was still far from support on the higher low pivot HLP. Or any other type of support to bounce from.
On the following week's action as seen outside the blue box it tested the HLP. Support.
It was one big drop as seen on the 60 minute chart where I laid a Fib. Grid the size of that drop, price begun to form a base on the red zone but wasn't enough to send price higher because first the bounce was weak, second it was only the third day of the new week and the weekly candle was forming a red narrow candle following a big red one, it was signaling that volatility was ending but not ready to bounce back to the top.
Remember that the bigger the drop the longer the base needs to be from where to bounce, most of the times.
On 60B It shows the whole five days through the 60 minute chart where price consolidated but couldn't trigger a bounce higher, the weekly chart kept weighing heavily following the resting period because the HLP. Support wasn't enough to bounce price higher causing another drop to find bigger support.
On the 60 minute chart I laid a Fib. Grid the size of the first drop once price rolled lower again to get some clues on the strength of the selling, price stopped going lower right at the 100% mark of the size of the first drop.
On 60C Price stabilized again, it had a weak bounce, formed a lower high only to form a LHP. To move lower again where I laid yet another Fib. Grid the size of the first drop starting at the lower high, but this time price on the green zone formed a double bottom.
Ask yourself why did price stopped going lower at such a shallow level in the fib. Grid compared to the other two big drops and what is that stoppage of the waving lower signaling and should you be getting in?
Price begun to move higher with more conviction, once price cleared the LHP. Area it had no resistance above, it bounced all the way to the top, retracing 100% The big drop turning the candle on the weekly chart into a big bottoming reversing tail.
On the top half of the next chart it shows the continuation of the potent bounce, I moved the Fib. Grid that I had just recently lowered to measured the strength of the bounce and price kept moving higher.
Why three green zones on that Fib. Grid? Because it was an oversold bounce into an area of zero resistance.
On the lower half of the chart I moved higher the same size Fib. Grid, once the second drop was retraced 100% Because on the first day of the new candle on the weekly chart there was no pullback just a very tight consolation (red asterisk seen on the 60 and daily charts) as price was about to enter another area of zero resistance above.
Four days later it retraced nearly 100% the first big drop, The lower gap opening that was immediately bought forced a shakeout of weak hands and released some overbought pressure IMO.
I told you, a very strange way of using Fib. Grids where some times the red zones turns into green zones if price begins to behave out of the normal wave forming behavior.
Should one always buy double bottoms? It depends on your trading plan, they don't work most of the time in a price vacuum, if price is near support on the larger TF. They have much better odds of working as explained in detail on previous lessons.
If you want to speculate on a high risk/ reward trade and you must enter a high risk double bottom, look for entries near the prior lows as much as possible if declining momentum has clearly slowed, with a tight stop to get out in case the big bounce doesn't materialize or worse price forms a LHP. To continue moving lower because the larger TF. It's not ready to move higher.
The chart above shows three time frames for FB. Its weekly chart was in a very strong uptrend but began a pullback to release some overbought pressure, shake some weak hands and to form a HLP. To move higher after a good shake down..
On the daily chart at #1 It shows one last higher opening gap to close the weekly chart with a big green candle, then it begun a ten day big pullback that retraced 100% the up move changing the uptrend to sideways on that TF.
#2 The bounce that followed was 50% the size of the big drop, formed a lower high pivot LHP. And continued moving lower where it closed under the last lower low pivot putting price in transition with bias lower.
Notice that the second drop indicated by the purple lines was smaller that the first drop.
#3 & 4 Shows the 60 minute chart in a downtrend. I laid a Fib. Grid the size of the last drop.
Once price formed a lower low on the daily chart it bounced 50% the size of the last drop to its declining 20 MA. Only to form a second lower high pivot LHP. Sending price lower to test the lows from six days before, where price found some support, consolidated four more days, finally collapsing and closing below the first lower low, thus establishing a new downtrend on that TF.
The purple line #1 Is bigger than #2. Purple line #2 And #3 Are the same size, if price drops to the bottom of the third purple line it will show the same amount of selling than the previous drop.
On the 60 minute chart it showed the same thing, the first drop was from 49.50 to 46$ Then I laid a Fib. Grid the same size of the first drop, from 47 to 43.50$ #4 and #5. Once price reached 100% the size of the first drop price stopped going lower, then had a potent reversal candle as seen above # 5. Right on the spot the third drop on the daily chart had reached 95% the size of the second drop and signaling a decreased on selling pressure.
That potent bounce on the 60 minute chart carried price all the way to the top retracing 100% of the drop, moving price on both the daily and weekly charts higher.
That bounce on the daily chart looked like it was going to stop again at 50% the distance of the last drop near its declining 20 MA. On resistance to form another LHP. And keep waving lower on and on, except that the weekly chart was in an uptrend but having a controlled pullback to pivot higher, it had formed a bottoming tail and possible setup bar on the last bounce on the 60 and daily charts.
#6 Price looked like it was going to begin waving lower again but it broke out higher with a big green bar, moving price further away from the low of the bottoming tail on the weekly chart and confirming the formation of the HLP. On that TF.
Once the HLP. Formed on the weekly chart a new up cycle began sending FB. To new all time highs soon after.
To understand time frame cycles read here:
http://chalannn.blogspot.com/2012/08/time-frame-cycles-from-monthly-to-15.html
I'm not going to bore you more with technicalities but to get an idea of how important it is to guess and anticipate where the next setup bar will form on the daily chart to continue the move higher on the weekly chart I present to you without comment: NUGT
Other than to recommend you to read the lesson on how and why the setup bar and the ensuing trend pivot forms, click the link:
http://chalannn.blogspot.com/2012/08/anatomy-of-trend-pivot-disclaimer.html
If this lesson doesn't make any sense to you, read the first ten lessons on this blog, because they explain in detail the method I use to analyze any stock in any market.
Feel free to leave a comment.
All charts are source www.FreeStockCharts.com
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