Readers, as I sit huddled over my computer keyboard, on this cold and wintery Melbourne night, I’m pondering what to bring you this week.
There are so many aspects to technical analysis (T/A), and ways to trade it that I could dribble on about it for hours, well weeks…
Actually make that several lifetimes.
Wave counts, MACD, trendlines, stochastics, fibbonnacci retrace levels, phases of the moon (seriously), fractal geometry, pivot points, moving averages…
Aaaaargh!
Eeeny Meeny Miney Mo… Trendlines and Moving Averages!
Alright, lets go…
Wednesday last week, prior to the cash market open I was doing my usual midweek analysis of the XJO futures, and taking a good look at the Weekly chart.
This is how the chart looked at the time:
The thick green line is the 21 period moving average and the thin orange line is the 13 period moving average.
As you can see on the chart, the last red candle was red and price was sitting right on the 21 Moving average.
I’ve found the reaction of price to the 21 period moving average is often quite significant, particularly in a case like this where price is testing this moving average for the first time after breaking through.
My immediate thought was a bounce here could be well be on the cards.
One of the joys of analysing price action is that if you start from a higher timespan, you can then zoom in and look at what’s going on at a lower timespan. Then you can see what might be about to unfold a significant price level is approached.
Funnily enough, I did just that, and went down to the daily timespan:
There are probably a too many lines and squiggles on this chart, but unfortunately I saved it in this state at the time. (A quick little insight into what happens when I have my crayons out and a chart in front of me… it gets messy!).
This chart is a snapshot before we get to look at what the price actually did… and the main point here is there are a number of things on this daily chart which suggest the trend showing here could be nearing exhaustion, meaning a trend change could be imminent.
These points are:
The thin blue trendline suggests the price may bounce off it.
A down trend on the MACD moving averages (middle pane) is showing a possible 5 wave count, and trends on the MACD seem to follow wave counts in the same manner as price (See an earlier piece I wrote on wave counts on price… How the Charts Predicted the Index Would Fall).
The Stochastic oscillator is showing divergence to price in its second entry into the overbought region. Price is lower, the stochastic is higher.
All these factors and a few more not mentioned, coupled with the earlier observed touch of price on the weekly 21 period moving average, helped me choose to go long when the market opened that morning.
Which, for the short-term trade I was looking for, was not a bad idea.
As we can see, price bounced nicely off the lower trendline, and a few points were captured in that trade.
But the market never sleeps, and apparently, neither do I…
I have added an extra trendline on the tops of the current daily down trend, and I have a thick arrow pointing to the 13MA.
The 13 MA in this particular timespan is the area I am looking at as a target for completion of this trade idea, and it corresponds nicely to dashed blue trendline, should price continue up.
A day of side ways and a day or two up, and this target could easily be reached.
If it gets there, I’ll be thinking short focus again.
One never can tell and the market is good at biting you on the bum when you least expect it, but personally I still have a downside target as shown on the messy daily chart by the dotted blue horizontal line, which I think needs to be met.
Let’s see what happens.
Joe Zolin
for Money Morning Australia
{ 1 comment… read it below or add one }
Isn’t it a head and shoulder pattern that could take us quite lower ?