November 11, 2014 Price Action

The Market has broken out of its pattern to the upside with a huge jump which occurred at 00:30 HST.  The news is reporting the reason is China’s rate cut.  The move has oversold the SPX RSI from the 15 to the monthly with only the weekly remaining below 70.  This was preceded by an AIQ Trading Expert having issued a 97 up for the NASDAQ market on November 20.  After the premarket advance in the index futures, an Engulfing pattern formed on the 5 Emini chart with a Failure Swing on the RSI and MACD, this was accompanied by high volume.  The Engulfing pattern eventually manifested to the 15 then to the 30 minute charts.  These too were accompanied by high volume.  This resulted in a drop to price support at the 2060 level.  A 123 bottom formed on the 5 minute chart with Failure Swings on both the RSI and MACD.  At the same time the bottom created a F/S on the 15 minute RSI.  The 1 hour showed a double hammer with decreasing down volume. 

November 20, 2014

The Market is still cycling upward 22 hours in duration with a magnitude of 20 points.  The entry occurred just below the 1 hour 200 MA.  The Day Closed with a 16 point gain in 9 hours.

The Bottoming formation was difficult since it Ved.  The 5 minute showed a Triple F/S on the RSI with a hammer on a double bottom which occurred 4:15 HST 9:15 EST.  

Remember the a continuation entry is often a leap of faith.

How Markets Move

Quite simply a market can do two things.  The conventional thought is that financial markets can either go up or down.  From a traders perspective the two things are TREND or OSCILLATE.  From this the trader knows two things.  First if a market is oscillating it will inevitable breakout and begin trending.  Second, if it is trending is will eventually begin oscillating.  While these concepts are simple, the difficulty comes in the realization that in the dynamic environment of trading, all four things are happening simultaneously on different time frames.

More on this later.

Mr. Pipman

The Best Technical Indicator

In real estate investing they say there are three rules; location, location, location.  Similarly, in trading and technical analysis there are also three rules; price movement, price movement, price movement.  In many of the publications I have read on technical analysis, somewhere in the early chapters the author states that the most important indication for predicting price movement is price movement itself.  This is then followed by several if not all the remaining chapters focusing on technical indicators ranging from A to Z.  Somewhere is the rhetoric the importance of price movement is lost. 

Do you want to learn to become a day trader?  If so study three things, price movement, price movement and price movement.

Mr. Pipman

Swing Trading the Emini

The Emini (SPX mini futures at 50 to 1) is moving up in waves.  If a standard 12/26/9 MACD is applied to the weekly price chart we can see that a price move of 150 to 350 point price move accompanies a cross higher.  The key comes in anticipating the cross and managing trades prior to the cross.  

The Divergence and Failure Swing

Chart for this article can be found by clicking on "My Yahoo Group Site" under the files section.
File name Charts for Article 6.doc

As you may have surmised, I use only the price chart and the MACD when searching for potential trades. In essence I look for 2 things; a divergence combined with a failure swing.

A divergence occurs when price moves in a different direction then the MACD. In figure 1 of the attached file, notice that price of the NASDAQ Index reached a lower low at point B then it previous had at point A. This occurred while the MACD, at corresponding point 1, is higher then it was at corresponding point 2. After this divergence between the MACD and price, the Index moved sharply higher. Bear in mind that this alone would not prompt me to put on a trade.

Normally the term Failure Swing is associated with the Relative Strength Index. For this study I will use the term to define a very specific pattern associated with the MACD. A failure swing occurs when price action forms a reversal pattern while the MACD diverges AND the “fast line” (green line) remains below the “signal line” (white line). Again refer to figure 1, notice the double top which was formed at points C and D. Now look at the MACD in the lower window. Not only did the MACD diverge from price action at corresponding points 3 and 4, it also revealed a “Failure Swing”.

There is one last step I take before I put on the trade; I consult the longer time frames. The chart in figure 1 is a daily chart. Figure 2 is a weekly price chart and figure 3 is a monthly price chart. Notice in Figure 2 at the right hand edge of the chart, the MACD has started to flatten slightly. This provided further support for the trade.

The monthly price chart in figure 3 provides the primary foundation for the trade. The MACD at the far right edge of the chart is moving lower. In addition, it is also leading the price lower. In a later article I will discuss the term “leading the price lower or higher”.

We have now created the most basic framework for my trading style. From this point forward most of my articles will use price chart examples to explore the more detailed intricacies of trading.

Call or email with any questions,

Bob

PS; After reviewing the copied charts, I see that it is difficult to see the MACD flattening in figure 2. To show this more clearly I have added figure 4 which contains the MACD Osc (histogram). Here we can see that the MACD momentum is slowing. Remember from the article titled Introduction to the MACD, the histogram shows a bar graph representation of the distance between the 2 lines.

The MACD Indicator

The Moving Average Convergence/Divergence Indicator or MACD has long been revered as the most accurate indicator. As a momentum indicator, the MACD tells us if the price movement is trending as well as the strength and direction of the trend. But more importantly, when use in conjunction with a price chart it has the uncanny ability to identify tops and bottoms with almost perfect accuracy. Of course one must learn to speak its subtle language.

The MACD can be used with any time frame from a 15 minute price chart to a monthly price chart. By fully understanding the MACD, a trader or investor can develop an excellent trading or investing plan. What’s more, this indicator works for all price charts I have studied, from stocks to futures to currencies. It is not necessary to know how this indicator is computed. You only need to know how to use it properly.

The MACD is normally comprised of 2 lines, the fast line and the slow line. I will refer to the slow line as the signal line. At times the indicator will include a “histogram” or bar graph representing the distance between the 2 lines. In addition, the histogram indicates which line is on top. I do not normally use the histogram and do not include it in my charting. If I cannot tell what is occurring using the 2 lines of the basic MACD, I do not trade.

The slope and relationship of these 2 lines tell us what is happening to price momentum and at times what is likely to happen in the future. Keep in mind the MACD cannot predict every price reversal but the reversals that it does forecast can be exceptionally accurate when it is taken into context with the general market. By this I mean if the Dow Jones Industrial Average, the S&P 500 and NASDAQ indexes are trending higher, a MACD “up signal” issued for an individual stock will almost always be accurate. The opposite can be said as well; in a down market a MACD “down signal” issued for a single equity is almost always correct.