Price is pushing for the third time in the last little while to break down below the broadening price pattern in TSLA … with the almost $1 billion convertible junk debt deal maturing this March with a conversion price around $360, I think the writing is on the wall for Elon …
One of the biggest things I don’t understand is all of the stories about how owners of new TSLA can’t get the final VIN’s from TSLA so they can register their car and get loans against them/get them officially registered. Some of the stories I have read imply a big ponzi scheme where Elon is taking advantage of secured lines of credit and the actual cash from the sale of the cars to try and keep things afloat. By delaying the release of the VINs Elon is able to ineffect get paid twice for the car – this only works for so long however, and I think the next 6 months will see TSLA collapse and end up only seeing the brand saved by a sale to an existing car manufacurer. What price will that happen at?
My son Paul who is 25, is very keen on better learning how to trade stocks. I have been trying to teach him as best as I can about the right way to go about learning, and all I can say is that I wish I had someone with as much knowledge helping me back in the day.
I’m trying to keep it simple, and teaching him basic principles that he can apply to intra-day charts at first, and then eventually, learn how to transport those fundamentals to the bigger task of swing trading using 195min/daily/weekly/monthly charts.
I won’t go into detail, all that I have try to teach him so far with the blog post, but I think it might make sense to sort of pick up the general ideas behind the biggest points he is trying to learn and put it down in blog post and PDFs so other readers trying to learn trading can also benefit.
So a bit more of a background on Paul – he is 25 as mentioned and has a good job in marketing/sales at the Canadian division of Genreal Mills (GIS). He has done a really good job saving money, and despite my warnings/cautions, he has been aggressively investing the past couple of yearss in both pot stocks and crypto stocks (along with others). Thank God Paul listened to my warnings well at times when I was telling him how/when to take profits. Paul even listened to me when I told him to buy GIS as part of the tax-loss trading I was doing in December … he texted me the other day feeling pretty good about all the money he has made on his corporate stock the last month (lol).
Anyways, some of the best advice I have been trying to impress upon Paul is that he should not try to pick tops and bottoms in stock moves, and that he should only enter a trade once he has “evidence” that price is moving in the direction he wants to trade. That generally has him looking at price in relation to the moving averages and price relative to the support/resistance ATRs.
Paul is trading in a sim account while he practices intra-day trading, and he has keyed into the 3x leveraged nat gas stocks DGAZ and UGAZ as his vehicle of choice the past little while because of all of the intra-day volatility. He’s making sim money and when I get him to explain in writing why he entered a trade where he did, it is obvious that he has listened fairly well to our lessons, and I think he his well on his way to a life long journey/education in successfully trading stocks.
So he told me the past couple of days about a couple of his trades on Thursday/Friday but I won’t bother telling you about what he actually said … bottom line is that he did the right thing on his entries. I will share with you the charts that I just emailed to him with a copy of my summary comments I made about those charts – all of the comments are basically the principles to what I am trying to get Paul to learn.
Here is the DGAZ 5min chart …
DGAZ – 5 Minute Chart
The above chart is from TC2000 and Paul has the same system along with the same chart indicators. The basic ones I have him following are a 20EMA and 8SMA signal line calculated off of that 20EMA. The charts also have ATRs and inside candle markers.
The next panel has DI+ and DI- indicators along with the ADX histogram which is basically the same as my trend strength histogram other than the values shown – mine are using 100 as the extreme level marker instead of the above ADX reading of 55.
The last panel is the 8-period Rate of Change drawn from the 20EMA … pretty much the same as my MA Spread indicator.
Here are the points I shot over to Paul in a quick email …
Early on, price could not get back above the opening 5 min candle’s high … eventually, price broke back below the moving avg’s (Point #1) … you could have been suspecting a break lower, and therefore prepared to either short the DGAZ or gone long the UGAZ (see next chart).
Point #2 … if you waited for the 5min ATR break before going short, you could have watched the push into the 20EMA and tried a short at that point … the DI- was confirming a downtrend and the ROC of the 20EMA was still pointing lower (the ROC was moving down and to the right).
If you didn’t see this chart until Point #3, you still had evidence that price was going lower … you could have tried to short the bounce into the 5min 20EMA.
Point #4 … the trend strength histogram was in the extreme strength warning zone so you should have suspected that the move lower was probably done much of what it was going to do … you should have taken any profits and not looked to short any bounce into the 20EMA. Count your profits and call it a day.
In theory you could have played the bounce back up higher, but you never know if it will just chop sideways in such a strong down trending day. One of the clues that could have led you to go long was the distance that price was from the 20EMA … in essence the rubber band was really stretched and likely going to see a bounce higher that you could try and profit from.
UGAZ – 5 Minute Chart
The opposite to the bear natural gas 3x ETF is the bullish one – UGAZ. The exact same chart should appear here from Friday, with some minor exceptions. Here are the points I made to Paul in an email earlier today.
price actually was able to peak below the low of the opening 5min candle … however, it wasn’t ever able to close the 5min candle below the low of the opening candle so you could have been looking for or expecting a bigger move higher at least to start the day.
Point #1 … price made it above the 5min moving averages and was consolidating there … more evidence that price wanted to move higher. Price finally broke above the ATRs and pulled back to the 20 EMA (Point #2) where you could have looked to enter long
Point #2 as mentioned was the first pull-back to the 20EMA after breaking the 5min ATR.
Point #3 was the next pull-back to the 20EMA and the next good place to enter a long if you wanted to add to your trade or if you did not partake in the earlier entries. You should have utilized the 1min and 2min charts to get your entry better timed for that 5min pullback.
Point #4 … extreme warning on the trend strength histogram … take profits and don’t look to buy pullbacks. Short here at your own risk. Note the inside candle markers at the top right after a doji candle – signs of balance in buying and selling which indicates that buyers are no longer winning the battle anymore.
UGAZ – 2 Minute Chart
UGAZ – 1 Minute Chart
So there you have it … I think I am going to try and document the lessons I am trying to help Paul with going forward as they are also good reminders to me of the fundamentals that all traders should keep in mind as you trade every day. Look for more posts and PDFs going forward.
Further to my more indepth road map on the NQ futures contract, it makes sense to see how the other major indexes are doing. Due to their rough similarity, I am assuming for simplistic case that the pattern for the ES and RUT are also ABC’s even though I am not 100% totally convinced they are because of the 1.618x extension target levels hit by the December lows.
This analysis is more about the bounce and where we go from here …
S&P 500 Index Futures Contract (ES) – 240 Minute Chart
So it appears that we are in the bigger SLOT resistance zone drawn off of the top of the October highs down to the December lows. It also looks like we are near the completion of a 3-wave price structure for the bounce off of those Dec lows.
Russell 2000 Index Futures Contract (RUT) – 240 Minute Chart
The RUT is in the SLOT drawn off of the November bounce highs down to the Dec lows … we are also nearing the downtrend resistance line drawn off of the prior two highs.
Bottom Line – it looks like it makes sense that we are at or very near a logical resistance spot for the major market indexes.
So no one said trading was going to be easy … I try as best I can to follow my chart indicators to confirm/raise suspicions about my price structure reads, and adapt on the fly as necessary. I thought it would make sense to review my read to-date, and try and see what the charts are suggesting from here.
Ok, the first snapshot should look back at what my last major read was.
So I have gone over in prior blogs why my read was what it was … suffice to say, when price extends to the 1.272x extension level, that is almost always the end of an ABC structure, and when it extends down to the 1.618x extension target, the price structure is almost always wave 2 of a 3-wave structure.
You can see that because of where the Dec low pushed to (i.e., the 1.618x target) I thought we were in the process of completing only the 2nd wave of a bigger 3-wave corrective structure. We will look at the bigger structure in a bit, but that is why I thought what I did.
On a smaller wave scale, it appeared at the time, that the Dec lows had not completed the smaller 3-wave structure that was making up the bigger 2nd wave. As mentioned, counting smaller waves is inherently more tricky and often less obvious … I make many errors when trying to determine smaller time frame waves because of the natural minor movements of price during these smaller time frames.
Long story short, I thought we would bounce off of the Dec lows and then push back down to make a new minor low just below the Dec lows. My software was painting dark blue extreme trend strength warning candles with pink divergence dots, and often price makes one last little push to new minor lows when these dark blue candles appear – not always, but quite often they do that one last push to extinguish the selling pressure.
So the bounce off of the Dec lows has been a V-bounce which are pretty rare … less rare during the whole QE-fed program of the past 10-years, but they are pretty rare nonetheless.
You can probably see the look of a 3-wave structure in the bounce off of those Dec lows and how price has pushed throught the SLOT resistance area I was monitoring. Price has just pushed into the resistance line drawn off of the tops of the corrective price action so far since the Oct high.
Because of the strength of this bounce off of the Dec lows, I think it makes sense to look at the entire corrective move as a possible ABC, and therefore, the lows may be in for the next several months. I don’t like to assume that something rare has occurred, but the emotion entailed in the December selling may have been something that caused a rare extension in a wave structure.
Before we go further, let’s look a little closer at that move into the Dec lows and the bounce seen since then …
So again, trying to count the smaller waves inside bigger structures is often tricky … I can see 3 smaller waves down into the Dec low, but you could also argue, like I have done previously that there were only 2 smaller waves.
Because of the strength since the Dec lows and the fact that we busted through the SLOT resistance zone I was watching, I think you have to argue that there were indeed 3 smaller waves and that price structure down into the Dec lows was complete … the only question is whether or not the Dec lows was the end of a C-wave and therefore a possible end of an ABC corrective pattern off of the Oct highs. If it was, then there is a chance that we are going to retry/retest the Oct all-time highs.
Or was the bounce out of the Dec lows “extra” strong because of the emotion involved in the late-month flush, and therefore, price was able to get through the SLOT resistance to the more important down trending resistance line off of the prior highs seen in the corrective pattern so far? If that is the case, then price could still be headed down to make a complete 3-wave structure that would make more sense considering where the Dec low was made at in terms of extension targets (i.e., at the 1.618x vs the 1.272x seen at wave-C lows).
Or we could be making an even more complex corrective wave off of those all important all-time highs made in October – remember, if those October highs were indeed the end of the bigger weekly 3-wave pattern off of the 2009 lows, then traders should not be surprised by a complex corrective structure off of those highs. I just don’t think that a simple ABC down to the Dec lows is complex enough to get the whole correction complete and we are therefore about to head higher on a new bull run to new highs.
Here is a possible look at what might be ahead of us …
So as shown above, anything really is possible ahead of us … all we can do is monitor the waves as they unfold, and then anticipate where we are heading to next.
All I can say right now is that I think we should be at a logical area of support, it appears we have a complete smaller 3-wave structure into this upper trend line, and we did that right into a monthly OpEx. I have noted several times on tweets and blog posts that price will often pivot right around OpEx expiry dates – if that happens here again in January 2019, then it would make perfect sense because of the look of a complete wave structure, extension targets getting hit, and finally, pushing right into that upper resistance line drawn off of the corrective pattern’s highs.
If we have made a top, then it make sense for price to at a minimum, head down to SLOT support … the 61.8% level is at 6205.50 currently. Price could bounce off of this level and then make the next bigger push higher, or it could fail at bouncing and we head lower to complete the bigger 3-wave price structure that I was originally calling for.
Bottom Line … I’m looking for a pull-back to begin anytime here, and we will see what happens as we move into SLOT support.
So this year’s tax-loss selling set-ups was unlike any I have executed over the past several years – the late-year selling in the overall market made it unlike any year-end that I can remember being a part of. I think I heard something to the effect that this past December was the worst in performance terms that the market has seen going back to I believe 1931.
So in the end, I was busy trading the market into year-end/early January, but I wasn’t really focused on tax-loss selling candidates. I ended up with only three positions that came out of my work … I continue to hold call March call options in VLO that I may end up taking profit in and rolling the strike up from the $70 level that I own currently – the stock is at $82.68 and it makes sense to roll it up to say $80, book a winner and let it go for another month or so.
My other oil & gas play was in APC ($55 call strike) and it expired worthless yesterday. My only other tax-loss position was in January 250 NOC calls which I sold it for a nice little win on Thursday.
So overall, tax-loss candidates were a real non-event for me this year … that almost guarantees that it will be a big factor next year!!
Here is the final data/watchlists that I was monitoring/keeping track of …
The above charts shows how the market basically bottomed together on Dec 26th … that is so unusual for my tax-loss strategy, but like I said earlier, it has been a strange/non-typical year this past year.
Watchlist Sorted by Change Since Nov 30/18
The above chart is sorted by the percentage change in stock price from the Nov 30th closing prices – note that only 17 out of the 45 stocks on the list are above their Nov 30th closing prices. The leader is GE, and that was one name that I did not want to trade because of the low price level of that stock – it didn’t make sense to trade using options, and I didn’t feel like trading 10,000 shares in a name that was facing questions about possible bankruptcy.
Watchlist Sorted by Change off of Dec 2018 Lows
The above watchlist is sorted by the % increase off of each stock’s December lows – the leader was Nektar Therapeutics (NKTR). That stock bounced 58.11% off of Dec low of $29.22. Note that 7 out of the top 10 on this list were energy stocks – that what I was referring to when it makes sense to look at the list every year in terms of sectors, because there may be other stocks from common sectors in that tax-loss list that a trader can trade in addition to the actual tax-loss candidates … sectors often bounce together.
The above chart is the final summary of all that has happened in these names. The thing to note is on the bottom right … you can see that in all respects, most of the names on this list outperformed the overall market (using the SPY as the reference) out of the Nov30th levels, the Dec lows, and the year-end prices.
If you look at the average for the watchlist, the change from the Nov 30th level was -0.8% vs the SPY at -2.6%. The change from the Dec lows averaged +25.4% for the watchlist vs +14.1% for the SPY, and finally, the change since Dec 31st for the watchlist average was +15.9% vs +6.8% for the SPY.
Note that all of the final price data utilized was adjusted for any and all dividends paid by the SPY and the watchlist names.
So again, I think that this strategy will be big value-added next year as I can’t imagine having two back-to-back year ends like the one we had this year.
The panel members of the Fast Money Half-Time are absolutely giddy today as they obviously view today’s break higher in the market as a clear sign that we are headed to new all-time highs. Are we? Maybe … let’s look at the charts.
NASDQ 100 Index Futures Contract (NQ) – 120 Minute Chart
When you actually look at the price structure of the move higher, you can still see that we are possibly making/completing a 3-wave corrective bounce right into the median line of the broadening price pattern that I have been tracking/following.
3-wave patterns are typically shows of strength and not typical of corrective price action – one could argue the extreme oversold position of the market at Christmas has led to a stronger than normal corrective bounce, but that it is still a bounce nonetheless.
That could be possible, but as a trader, when price pulls back from this original move out of the Dec lows, I have to be on guard for minor support to hold and another attempt to move higher. That is still to come however.
The bullish scenario that leads to a retest of the all-time highs would be best if price were to pull back into minor support after completing this initial 3-wave bounce. Price then could make another push higher.
However, based on my current read of price structure, I am still holding out as my favored scenario, one where we head back down and make a new marginal low below the Dec 2018 low. That would likely be the end of bigger wave-2, and lead to a more meaningful bounce into resistance that would likely last about a month.
Is it even possible that we are at resistance here and about to head lower? I think so … we are at the median line in the broadening price pattern; we are in the 1.272x – 1.618x extension price target zone drawn using Wave 1; we are right at the upper limits of the SLOT resistance zone (just a touch over with today’s break higher); and finally, we have pushed into the minor 1.272x-1.618x extension target zone for the last minor wave 3 of the corrective bounce.
The final test would be whether or not we can see a smaller 3-wave structure inside wave 3 of the corrective bounce so that we can call a possible end to the bounce with today’s price action.
NASDQ 100 Index Futures Contract (NQ) – 15 Minute Chart
I can count 3 minor waves on the final move into resistance here so yeah …. it is possible that we are making the final move of the corrective bounce higher here today.
Only time will tell …
Bottom Line … when you try to determine price structure of smaller time frames, it is often a very tricky en devour. Key to not losing your way is to be patient and be on guard for something other than what you are expecting to possibly occur. That is why I always look at both sides of a possible trade structure.
S&P 500 Index Futures Contract (ES) – 60 Minute Chart
The bounce in the ES contract looks almost identical to the NQ contract that I wrote about earlier today.
Russell 2000 Index Futures Contract (RUT) – 60 Minute Chart
The RUT is right at the 61.8% resistance level in the SLOT.
If my bigger wave count is correct, then today’s move higher in the equity markets looks like it would make perfect sense to stall out and then head lower to complete the bigger 2nd Wave on my corrective pattern road map.
Price is getting close to a potential turning point …
NASDQ 100 Index Futures – 60 Minute Chart #1
Sometimes trying to guess too early the shape of a corrective wave can cause you to draw the right conclusion. Typically I like to see a break of the 60-min (or 65-min if using TC2000) ATR levels before I begin to try and count waves to see if a wave price structure can be determined.
The 60-min ATR support for the NQ was broken today so I am now updating what I think the wave count is most likely for this bounce into SLOT resistance.
As you can see, price is just above the 1.272x C-wave extension target and below the upper level of the SLOT (i.e., the 78.6% level). Note that this is also very near to the median resistance/support line of the broadening price pattern I have been following for the NQ futures contract.
From a time perspective, the C-wave will be equal to 100% of the A-wave on the 3pm-4pm candle today (January 10th) … so to me timing and price finding resistance in the SLOT here makes sense.
Now all I really need is to see if I can see an obvious conclusion to a smaller wave structure (i.e., the waves inside of the final C-wave move higher).
NASDQ 100 Index Futures – 60 Minute Chart #2
To me it looks like we could be making the typically expected 3-minor wave C-wave … the high of my 2nd wave is 6645.00 – the high so far today is 6628.25.
One thing to keep aware of is that waves in smaller time frames often fail to complete, in part, because of the stronger forces of the bigger time frame price structure. What I am saying is that if price fails to make a new minor 3rd high for the C-wave, it is still possible that the move higher was actually completed today with that failed iii-wave.
Bottom Line … maybe the bad retailer announcements today along with American Airlines taking down estimates are enough to cause price to fail in the last little leg higher. Be prepared for anything.
I have not seen anything to make me think that my bigger wave count is incorrect, so I am still looking for resistance to take hold.
I spent some time yesterday explaining my roadmap for the NASDQ 100 Index futures contract (NQ_F) (click here). If my current read is correct then price is near completing its move up into SLOT resistance.
NASDQ 100 Index Futures Contract (NQ_F) – 15 Minute Chart
As mentioned in yesterday’s blog post, the Point of Control for all of the trade action during the minor wave 2 lower was at 6516.50, which was also right around the 61.8% Fibonacci resistance level in the SLOT. As you can see in the above chart, price has made the typical 3-legged move during what I am thinking is the “C” wave of the corrective bounce into the SLOT.
If my read is right, then price is going to fail at moving materially higher from here before it turns lower to make what I think will be a minor low below the Dec 24th low. That 3rd wave low will complete the bigger Wave 2 and setup a bigger bounce into a bigger level of resistance. From there, I think we head lower one more time to complete the 3-wave corrective pattern off of the recent all-time highs.
I received the following comment on my bog site yesterday …
Basically, Taylor is asking whether there is a possibility that we have made our final move lower into support with the late December move. I started to write a reply to this question on the blog and I realized that it would be better answered with a detailed blog post that showed exactly why I thought the way that I did – this way any interested reader of my posts can actually learn something and apply it to their own chart analysis going forward.
Back to Taylor’s question … my short answer is that anything is possible, especially when you consider all of the market manipulations by central banks and governments around the world. Beyond that general comment, my answer would be “No” … and I say that because I fall back to the rules I learned about the structure of price waves in the financial markets.
I have a older 2-part PDF in my Education section that details wave measurement rules (Trading Wave-to-Wave) and I would encourage all readers to take a look at those documents.
I think it makes sense for me to try and apply those wave structure rules to the current corrective move being made in the NASDQ 100 futures contract. Ok, let’s get started …
Through-out this blog post I will talk about impulsive and corrective wave structures … when I speak about impulsive wave structures, I am referring generally to price moves that do not have overlapping candle structures and in wave speak, looks like an expansion phase move. Corrective wave structures generally have price candles that overlap each other to a great extent.
For impulse waves, the first basic rule that traders should be looking at when analyzing price waves is …
When price is in a possible impulsive wave structure, the impulsive wave will be either a 2-wave or 3-wave structure. You will know you are completing a 2-wave structure when the second leg/wave terminates at the 1.272x extension target area (using the start to the first wave as the anchor for measuring the second wave).
So let’s look at the NQ futures contract and begin back at the October 1st high …
So to begin with, traders don’t know for certain whether or not a wave structure has ended/ begun until well after the official end/start to the move. No trader would have known that October 1st was an important high in the NQ futures contract until well after the fact … if you were analyzing the price wave structure into that high you may have had reason to believe that a high was being made, but you would not have known for certain until price began moving away from that price high.
I like to use ATR resistance and supports drawn on my charts as a type of “first/early warning” of a possible change in trend, but even with that type of trading system, you have to understand bigger time frames and how price will make pull-backs of varying degree all the time during a trend move. I don’t want to get lost in how/when traders could or should have been able to call the October 1st top in the NASDQ … what I want to focus on is the price structure after it became obvious that a top had been made and we were making a larger time frame corrective move lower.
So let’s just say that you were on holidays in early October and you arrived back to work sometime during that first week. If you were looking at the NQ chart anytime after October 4th, you should have realized that price was “impulsing” lower and began looking at smaller time frame charts to see if you could ascertain where price was in terms of wave structure rules.
One simple price movement rule that traders should have ingrained in their brains is that price will often have three pushes into pivot points … on the above 60-min chart, On October 8th traders should have been quick to see 3 pushes into that day’s low. Over the next day and a bit, price made an overlapping abc corrective wave structure, and if you undestood how price waves work, you would have realized that you had probably just completed 2 waves of a probable 3-wave structure.
So where should you anticipate Wave 3 terminating? Generally, Wave 3’s will terminate around that 1.272x price extension target drawn using Wave 2 and the beginning of Wave 2 as the anchor.
You will see on the above 60min chart that price moved well through the normal 1.272x extension target and actually waterfalled lower to take out the 1.618x level. That is not the norm, but entirely possible – that is why I wait for price to tell me it has finished moving before I become convinced a wave is done.
I do that by watching smaller time frames, and by using a series of chart indicators … to keep things simple, I do not show those chart indicators but I do have my colored candle system on this blog post’s charts. You can see that at the end of wave 3 price began overlapping and the candles were painted dark blue with pink divergence dots … dark blue candles visually warn me about the trend strength of the move in price being at a level that historically have been very difficult to maintain (i.e., the trend should be near exhaustion). The pink divergence dots are painted when the trend strength is > than 100 on my indicator but declining from the prior candle’s reading.
There are some nuances in understanding trend strength and various time frame comparisons, but suffice to say, when you see dark blue candles with pink divergence dots, price is often near or almost at the end of that expansion phase.
So no, price did not stop exactly at the 1.272x as I would normally expect it to … it did not even stop exactly at the 1.618x level. I use those extension targets as an “AREA” that I expect to see price to find support/resistance.
Obviously price was making an emotional move lower here as indicated by the large range waterfall candles. More importantly to traders is that you understand that price had found support and now was going to move higher out of support.
As a trader, you have to be thinking ahead … you would normally have two thoughts to weigh when you see price finding support. You have to decide whether price was likely to have finished moving lower and was likely to make another attempt at making a new high on the next move higher, or you would have to think that price was likely making a multi-leg correction lower and that this first move lower was therefore likely part of a 2 or 3 legged move lower.
If you have read many of my blog posts, I show in multiple examples why I think that the early October highs in the market are in fact a very important high pivot, and therefore, my thought in early October was that we were going to find resistance in the SLOT coming out of the October 10th low.
Again, I have been wrong often in analyzing charts, but on the bigger wave structures, I have a pretty good feel for what is going on, and I would argue that I have made more right calls than wrong ones. But I do misread what is happening, so I always keep in mind that the market is going to do what it is going to do. So in mid-October I was playing a bounce higher in the NQ and I was expecting resistance to work, but I wanted price to show me that it was respecting resistance, and was in fact going to head lower in a 2nd or 3rd leg price structure.
So the first minor point to make on the above chart is that the dark blue candles with pink divergence dots in early October were actually exceeded with a push to a new minor low – again, that happens often when price is making a move into support or resistance … not every time, but it is something I have learned to watch for.
Take a look at the price action from October 12th-15th … totally overlapping and therefore confirmation that what we were likely making was a corrective bounce higher – more evidence that SLOT resistance should hold this bounce higher. On smaller time frames, price makes many wiggles, but I have labelled the corrective wave higher – abc in the first or bigger A-wave and while not labelled, the bigger B wave had multiple 2-legged waves into support.
Please note that price did not make it all the way back into minor SLOT support (50% – 78.6%), and only made it down past the 38.2% Fibonacci level. You will often see smaller time frame corrective waves only make it to the 38.2% level and not all the way back into the SLOT … that is another subtlety that traders must except. Take all of the evidence that you can garner from your chart’s indicators to determine whether or not a pull-back is complete and be open to your “general rules” to be on occasion not met.
The bigger wave I was trading in October was for a move up into resistance and then lower from there … and out of those two moves, I was more concerned about the bigger move coming out of upper SLOT resistance. You can see that price did make it into resistance and did in fact paint dark blue “extreme warning” candles with pink divergence dots.
Can you gear down to a smaller time frame to see if it makes sense that resistance would hold there?
So looking at the above 30-min chart, I can see price making three pushes higher into the SLOT and dark “extreme warning” blue candles with pink divergence dots being painted. To me that is what I want to see and in this case what I would expect to see.
However it wasn’t until October 17th/18th that you really had “evidence” that price was very likely finished moving higher – again, no guarantees in trading, but all evidence to me tell me that a corrective bounce had completed 2 legs higher (i.e., an ABC) and the C-wave had completed its normally expected 3-wave move into the SLOT. The dark blue candles, and the price action out of that interim high was plenty proof that price was likely headed lower in the next move.
So what do we “know” here? You should know that price was headed lower into the next level of support. You don’t know whether or not the move is going to be two waves or three yet but at a minimum, it will be a 2-legged move.
Simple corrective patterns are typically 2-legged, and more important (i.e., higher time frame price patterns) are typically more complex and therefore 3-legged or 3-wave in structure. But again, you don’t “know” ahead of time what this correction is going to be … you can have your thoughts, and I clearly have stated a number of times I think the October all-time high is an important pivot and therefore I am expecting a complex correction off of the top (i.e., a 3-legged correction)
But traders should not let the wagon get ahead of the horse … draw your extension targets and try and trade price as it makes its way down into potential support.
So again, traders should have been expecting price to make it down to at least the 1.272x extension target (dark blue) … price is going to make many smaller waves on its way down into possible support, and in real time, many traders are likely going to be convinced that support was made. However, I like to ask two simple questions when waiting for support to be made/hit … is price at a point where support makes sense (i.e., at a 1.272x – 1.618x extension target), and can I see a smaller time frame price structure complete a move into that level? If I can’t see a possible smaller time frame wave complete into support, then I am wary of the move being complete.
In the above 60-min chart, I labelled a possible 30-wave move into the bigger 1.272x extension target level … I even drew extension targets for that smaller 2nd and 3rd waves. I did this to in part show how waves never hit my levels exactly, especially in smaller time frame moves. Minor wave 2 did not quite make it down to 1.618x, but we were not close to the bigger 1.272x minimum target I was watching so in real time, I would have to say that this point was the end of the 2nd minor wave.
The third minor wave made 3 smaller waves inside itself, but again, price exceeded my “rules” and pushed well beyond the 1.272x-1.618x target zone (drawn in brown and green). Traders need to be flexible and think about the bigger structure and not caught up in every small wave being according to the rules.
The more important point for traders would have been the move into the bigger 1.272x target and the price action around that support level. I wrote a blog post on October 27th where I went over the move into support for all of the major indexes that I follow (click here) … here is the NQ chart.
So again, I don’t “know” for certain that price is going to act the way I have drawn it on the above chart … all I know is that according to the price wave structures that I have learned and have proven to myself they add value to my trading, I was expecting price to unfold at a minimum like the chart above.
I could have been wrong and the price correction could have been over with just one ABC off of the October high … I go into great detail in that October 27th blog post why I thought the move down in October was just the first leg of at least an ABC corrective pattern – I won’t repeat those thoughts here, but suffice to say that I was open to resistance not holding as I was forecasting in early November. I was expecting resistance to hold but price was going to have to prove me right or wrong before I became committed one way or the other.
My favored scenario had price holding support at the 1.272x at around my October 31st time target/window … I then expected to see price find resistance at the 50% level (symmetry with the prior bounce into resistance) on November 8th (assuming that my support would be found on October 31st).
I could have been wrong and price could have blown down through the 1.272x target into the 1.618x level. My thought at the time, however, was that for price to go much lower during this corrective move, it would first need to bounce and suck in some more bulltards to fuel an eventual push to lower levels.
So my thought on October 27th was the 1.272x zone was going to hold, but the bounce from support would respect SLOT resistance and then push at a minimum down to where an ABC/2-legged corrective pattern would find support (i.e., at the 1.272x target zone). It was possible for price to push below that 1.272x here at the end of October and signal to me that the corrective pattern was going to be 3-waves right out of the gate, but that was yet to be proven/shown to me. My first rule is to look for the possibility of support at the first 1.272x target.
Sure enough, support came in around that 1.272x level on October 29th, and then price pushed higher into SLOT resistance
The first wave higher in the corrective bounce can be labelled as a minor 3-wave structure. It terminated right at below the 50% level (7154.75) at 7143.25. So why did I not expect that to be the top of the corrective bounce? Are you paying attention? I have said a number of times, I want to see a 2-legged corrective bounce that terminates in the 1.272x – 1.618x extension target zone inside the SLOT. The first and most basic requirement of having 2-legs was not even seen here yet.
Several years ago, a follower of my blog posts wrote to me about a time when he shorted the SPY in an example just like this one … the SPY had made it just short of the SLOT and looked like it was finished bouncing. I wrote a blog piece about that example and called it my “Patrick-Rule” after that particular blog follower. I wasn’t trying to pick on this reader, I was just trying to make a point that would stick with him going forward.
What happened in the Patrick Rule example, was that he was correct in that the move higher looked like it had terminated … what he didn’t wait for however, was a 2-legged price structure that made its way into the SLOT. A corrective move can fail to get into the SLOT, but it has to at least show two obvious separate legs before I will count my chickens and assume it is complete.
The NQ chart above showed that price moved down to a level just barely short of the SLOT, but note here that price had carved out an obvious 2-legged correction into what turned out to be the B-corrective wave inside the bounce higher.
Price then made a 3-wave move in the last C-wave of a corrective bounce which is text book what I would expect in my wave structure rules.
The price move into the SLOT made 3 minor waves in that final C-wave, and terminated at the 1.272x extension target for that 3rd minor wave and my software painted dark blue “extreme warning” candles with pink divergence dots. This happened on November 7th which was more or less where I would have expected it to happen if I had drawn my forecast using the actual October 29th low vs the Oct 31st date I was assuming when I drew my October 27th road map.
So what comes next? Again, I fall back to my price structure rules … if you go back to the 195min chart from my October 27th blog piece you will see that I was expecting price to next come down to atleast the 1.272x target to complete a possible bigger ABC corrective pattern. I could be wrong and price could be making an even bigger 3-wave corrective pattern to the downside, but I would be shown that by price over time going forward. My first rule is to look for a possible ABC …
But what happened? Price looked like it made a two-legged wave lower and found support prior to the 1.272x level. If the move lower was indeed a C-Wave it should have formed a smaller 3-wave structure and terminated around the 1.272x target. Once price showed me that it had completed a probable 2-legged move lower and was bouncing, I had to assume that the move lower had made the first leg only of a bigger multi-legged move into support.
What does a trader do next? Look to the expect SLOT resistance level and monitor/trade price as it bounces higher.
So what happened on the bounce higher? Well, price made what looks like a nice little 3-wave structure move into the SLOT … it wasn’t text book, but it seldom is. What actually happened was price gapped open higher on Dec 2nd and actually pushed price through the upper boundry of the SLOT. I don’t usually like to see that happen, but because price gapped higher and then reversed lower back into the SLOT during normal cash trading hours, I was ok with that move – I still expected the SLOT to hold and for price to push lower.
I didn’t obviously know for sure, but everything up until this point made me think that price still needed to go down, at a minimum, to the 1.272x target level to complete the ABC. Also still possible was a move down to the 1.618x level which would then tell me that price was actually making an even bigger 3-wave price structure, and that price would only have been finished the 2nd of 3 waves when it found support around the 1.618x level.
I highlight the two area on the above chart … if the pattern was going to be an ABC, then price should make a final 3-wave move into that 6268.25 area. If it was going to signal that we were making a bigger 3-wave pattern, then it needed to blow through that 1.272x target level and make it down to the 1.618x extension target.
This is where it gets interesting and where Taylor asked me his original question about it being possible that the corrective move lower is complete.
Hopefully Taylor and other readers can more completely understand it when I say that “the move lower could be complete, but based on all of my price structure rules, it can’t be”!
The move lower through the 1.272x target of 6268.25 down to the 1.618x target level of 5871.00 means that we are “likely” making a bigger 3-wave corrective pattern, and that the low trying to be made now is only the end of wave 2.
The above is what I can say with confidence based on all of my experience as a trader and as someone that understands price structure. The interesting thing facing traders right now however, is the question of whether or not Wave 2 is complete since we hit that 1.618x extension level.
Remember what I tried to impress on you … firstly, those targets are only a target and a zone. Price can often exceed those exact levels by some margin. What is often more important than an extension target level, is wanting to see the completion of the actual smaller price structure.
In the above chart I show what looks to me a 3-wave structure that has only competed 2 waves lower and is bouncing into resistance. I draw the 1.272x and 1.618x extension target using brown and green to differentiate it from the bigger pattern’s blue and purple.
I also drew the extension targets using the “alternative method” that I more fully explain in the education pieces mentioned earlier – I won’t go any further into that explanation here in this blog.
One other of my price structure rules is that the bigger price targets are more important than any smaller extension target – that is why I think the final move lower in this 3-wave structure into the bigger Wave 2 support is likely to be a minuscule break below the low of December 24th. That would complete the smaller 3-wave price structure and keep the final level around the 1.618x target for the bigger 2nd wave at 5871.00.
Is that clear enough?? LOL
To make it even more interesting, is that we have pushed into the SLOT with an obvious 2-legged pattern and just short of the 1.272x – 1.618x target for the final push of that last bounce.
So there you have it … I think we are almost finished bouncing into resistance in the SLOT (the Point of Control for the Volume Profile for the minor 2nd wave lower is 6516.5 vs the Friday close of 6431.75).
From there, I am only expecting price to complete the wave 3 move to just below the Dec 24th low to make the wave complete, and stay around the 1.618x extension target for bigger Wave 2 support at 5871.00. The Dec 24th low was 5820.50.
From there price should bounce into SLOT resistance at around 6880ish and then make one more price structure move lower into the typical Wave 3 target at the 1.272x extension target using wave 2 for your calculation – I used 5800 as my wave 2 termination value.
Again, all of this could be wrong and we could be complete as Taylor is suggesting/questioning … however, all I know is that I am going to trade whatever happens to be the case, but as an experienced trader, I am going to anticipate what “should” be the case going forward, and by that I mean what price structure rules imply will be the support and resistance levels.