Trading Psychology Edge

Spring!

As I detailed last night, yesterday’s low was indeed the key level for today.  The pull­back this morn­ing went under­neath yesterday’s low, then, as expected, ral­lied higher.  A nice spring.  If still long, con­sider tak­ing at least a piece off as we enter into the noon hour.  It is Fri­day after all.  For heartier souls, 1395 area would be sig­nif­i­cant resis­tance.  I don’t know that it will get that high, but who knows!

Have a great week­end everyone!

As we antic­i­pated last night, we saw addi­tional fol­low through to the down­side today.  Today’s trad­ing was not as clear as yesterday’s mar­ket, but trades were avail­able, nevertheless.

Two Short Trades Today

After the mar­ket broke yesterday’s low, the two-day low (which was a bit lower) became the key resis­tance level.  A short trade on the 3,000 Tick chart around 10:00 East­ern Time (first red arrow) con­firmed by lit­tle Weis Wave demand led the mar­ket to new lows.

Later in the day, the mar­ket revis­ited the morn­ing highs and set up another short for a retest of the day’s lows (sec­ond red arrow).  Again, the Wies Wave showed a lack of demand at this level giv­ing the go-ahead for a short.

The mar­ket looks like it got a lit­tle over sold today.  While it can cer­tainly go lower, watch today’s low (1382.50).  This will be impor­tant tomor­row.  We may hold above it and try to rally from there.  Or, we may dip below it and come back up above it and hold.  This would set the stage for a bet­ter rally.  If we drop under­neath yesterday’s low and con­tinue lower, then it tells us we have more down­side to go before buy­ers are will­ing to come in.  I view the lat­ter as the least likely tomor­row, but cer­tainly possible.

A trader sent a very good ques­tion last night on a recent post.  Since he sent it via email and since it is such a good ques­tion, I decided to make it into a sep­a­rate blog post.  You can see the orig­i­nal post that he is refer­ring to by click­ing here.  In that post I noted a loca­tion for an aggres­sive long trade.  I’ve posted the chart he sent with his ques­tion along with my response.

His Excel­lent Question

He asks what the ratio­nale is to go long at point b1.  He goes on to say that in real-time, he would con­sider this as a down wave with aggres­sive sup­ply and not ‘bag hold­ing.’  He won­ders how we would see this as bag hold­ing and not supply?

The Answer

It is an excel­lent ques­tion.  Let’s take this sec­tion of the chart (high­lighted by the blue box) apart and see why.

Read it mindfully!

Overnight, the mar­ket fell in a strong move down (A).  We see momen­tum in the price action and also in the 3–10.  Given that momen­tum, we would expect follow-through to the down­side.  So we have a small rally to X and after this rally we would expect the mar­ket to drop fur­ther (red arrow) if sup­ply were in con­trol.  But, it doesn’t do that.  Instead, we get a strong rally at B (green arrow).  We see strength in the price bars, wave struc­ture, the 3–10, and the wave vol­ume.  If this is the case, then we have to think that the move down at A could be a shake out.  As always, we need confirmation.

Con­fir­ma­tion comes on the reac­tion (b1).  Yes, there is more wave vol­ume, but this is due to it being in the first half hour of the US open.  Despite overnight mar­ket activ­ity, we still have the most vol­ume traded dur­ing the US ses­sion, and a lot of that comes in the early and late peri­ods of the US ses­sion.  So, we need to take that into con­sid­er­a­tion when com­par­ing early US ses­sion wave vol­ume with the overnight wave volumes.

The reac­tion down to b1 was cor­rec­tive in nature (the a-b-c).  Draw­ing proper trend chan­nel, it also became over­sold. at the low.  In con­trast to the up wave B, spreads and price action were also con­firm­ing a lack of sup­ply.  The wave didn’t come all the way back to sup­port (top of X), which would have made it an easy long; hence the ‘aggres­sive’ label.

How To Approach A Trade Setup

When look­ing at the mar­ket and espe­cially at a trade, we want to men­tally go through all the things we know about this method and be very mind­ful about what we are see­ing.  It is so very easy for us to see only the last few price bars, the last wave, or the last trend chan­nel and make a deci­sion.  We do not want to do that, as that is one of the things that gets us into trou­ble.  As read­ers know, I empha­size a dif­fer­ent approach, and this ques­tion (thanks, Dmitry!) give me a chance to high­light that for us all (myself included, as I still can make this mistake!).

Can This Be Learned?

What we talk about here are the kinds of things we learn in Chart Read­ing Mas­tery.  I’ve had a few emails ask­ing what’s included in the course and why is it so dif­fer­ent than other trad­ing courses (is it really worth it?).  Well, the above is the kind of things you learn: how to really read the mar­ket by its own actions and where the very best oppor­tu­ni­ties are to take trades — not based on some 3/4-criteria trade setup, but a deep under­stand­ing of mar­ket struc­ture, how to read it, and where choice trades lie.  Of course these things can be learned.  It does take ded­i­cated effort, but it cer­tainly is doable.  We are start­ing this course again shortly, if you are interested:

Chart Read­ing Mastery

We are at an inter­est­ing place in the stock mar­ket right now.  Cer­tainly bull­ish.  We have been ral­ly­ing with­out much pull­back for sev­eral months.  In fact, on a weekly basis, we have not had a down weekly close since the first of the year.  It’s an impres­sive market.

Watch Yesterday’s High

We could be in for a down day tomor­row, how­ever.  Yesterday’s action gave us a lower low and a lower high on the day, along with a lower close.  Vol­ume was sus­tained.  It’s the first time in a while that we have seen increas­ing daily vol­ume and the mar­ket stall.  It appears like the mar­ket is hav­ing a lit­tle dif­fi­culty mak­ing upward progress.  We also see more intra­day wave vol­ume come in to the down­side yes­ter­day than we have seen in over a week (see 27K Tick Chart).

Of course, the mar­ket may sim­ply shrug all this off and push higher.  We are clearly in a bull­ish up trend.  There is no doubt about that.  But tomor­row I will be watch­ing the trad­ing around yesterday’s high.  If we can’t hold that level (1405), odds favor a push back down to yesterday’s low and pos­si­bly lower.

Today’s S&Ps (ES) didn’t give too many oppor­tu­ni­ties to trade.  Yesterday’s high fig­ured promi­nently in early US trad­ing, as it often does.

Intra­day Trading

The overnight mar­ket sold off sharply (A) after push­ing above yesterday’s high, mak­ing a new high.  Usu­ally, when we see a sell off like this, we would expect the mar­ket to move back up to test yesterday’s high with weak­ness on the rally.  After a weak test, and often a lower high, the mar­ket con­tin­ues to sell off.

But here we see demand come in on the up wave at B, push­ing price up above yesterday’s high.  In typ­i­cal fash­ion, the mar­ket traded around yesterday’s high with­out show­ing much sup­ply.  An aggres­sive long was avail­able at b1; a less aggres­sive long-side trade at b2.  Tar­get: a push above the Globex high.

The rally up to C showed good demand on the Weis Wave, and a small absorp­tion action around the Globex high.  We can keep the long trade, or at least a por­tion of it as no weak­ness shows itself.

As we reach the top of the trend chan­nel, tell-tale signs of weak­ness appear.  The Weis Wave shows demand tir­ing on D and E.  Longs exit here.  A small, counter trend short was worth while for a play back to the bot­tom of the trend channel.

——

We will be start­ing Chart Read­ing Mas­tery in a cou­ple of weeks.  It is hard to believe, but we are already half-way full.  We have to limit the num­ber of class mem­bers because of the indi­vid­ual chart review.  The last few times we have offered this course it has filled up, and it seems to fill up quicker each time.  We will not offer this again until win­ter.  So, if you are inter­ested in learn­ing to read the mar­ket, apply mar­ket struc­ture, and come away with sound trade setups, you can click the link below to learn more:

Chart Read­ing Mastery

I had two ques­tions this week­end: one was from a stu­dent of one of the past Chart Read­ing Mas­tery courses.  He was ask­ing about the recent activ­ity in the Gold mar­ket.  Last week on Fri­day, the intra­day mar­ket sold off sharply, then reversed and ral­lied briskly up  putting in new highs on the day, and also for the week.  How does one deal with this?  Is it sup­ply over­com­ing demand or demand tak­ing out sup­ply?  Is there a way to tell?

The other ques­tion was from a per­son ask­ing whether the Wyck­off Method would be work­able for non-day trad­ing time frames.

On the 5-minute chart, Friday’s action did look dra­matic.  Frankly, it is very hard to tell if a mar­ket is going to have a V-spike rever­sal like it did.  One clue is the vol­ume, but that isn’t always easy to read when volatil­ity is high.  We cer­tainly don’t want to be try­ing to buy “a falling knife.”  It is not some­thing I try to trade.

It always pays to keep the higher time frame pic­ture in mind.  Struc­ture is some­thing we empha­size in Chart Read­ing Mas­tery.  Trade setups that are con­sis­tent with struc­ture have much bet­ter odds of play­ing out in our favor.

mini Gold

Look­ing at gold, we can see the struc­ture this morn­ing on the 60-minute chart is con­ducive for a long trade.  Among other things, the pull­back has not drawn out sup­ply.  It has been well-behaved in the trend chan­nel off Friday’s high.  We see evi­dence of buy­ers step­ping in on the hourly chart at the bot­tom of the down­trend chan­nel flag­ging a buy spot.  For day-traders, the 5-minute chart also had a spring this morn­ing (5-minute chart not shown, but you can see the spring loca­tion from the green arrow on the 60-minute chart) set­ting up a low-risk long trade.  It now needs to rally father above the 60-minute sup­ply line to con­tinue the momen­tum seen Friday.

Gold is an inter­est­ing mar­ket here.  You can see on the daily chart that the mar­ket has been trad­ing around its cur­rent price level level for sev­eral months (blue line).  Push­ing back up and above Friday’s close could trig­ger a decent rally.  Break­ing much below today’s low could bring sell­ers in and send the mar­ket down lower.  Over­all, this sit­u­a­tion could be of inter­est for the longer-term trader.

So, from both a day-trading and a longer-term per­spec­tive, we can take a mar­ket and under­stand its struc­ture, locate choice trade loca­tions where risk is defined, under­stand what it must do next, under­stand what it shouldn’t do, and also see it’s larger poten­tial.  We will see how this one plays out.

As past stu­dents know, we look at all time frames in Chart Read­ing Mas­tery.  We will be start­ing this course on April 4.  It runs for eight weeks and always fills up (we have to limit the num­ber of mem­bers because of the weekly chart reviews and indi­vid­ual feed­back given to each mem­ber).  It will not be given again until next win­ter.  If inter­ested, you can learn more here:

Chart Read­ing Mastery

It’s Helen’s day today!  Any­one inter­act­ing with us knows that Helen keeps it all together.  She is my rock, for sure.

This photo was taken in New Hamp­shire early last spring.  We were com­ing back from a hike up into Tuckerman’s Ravine on Mount Wash­ing­ton.  You can tell by her smile it was a great day.  Then again, most all days are great with her no mat­ter what we do.  Happy Birth­day, Sweetheart.