Tuesday, September 1, 2009
Gap fill levels are gems
August 31 was an "NR7" day in the mini-Dow (narrowest range of the last 7 days). Many technical traders consider it a sign of an upcoming expansion move. You can google it and get all the info you'd want. Whatever the case, the market moves from periods of expansion to contraction, back to expansion, back to contraction, back to expansion, etc., etc. It does this expandng and contracting in both range (how much the bars move from high to low for any period), and in speed (how fast they move). The daily chart seemed a bit toppy too so maybe we were due some range expansion. The 31st was actually the smallest range of the prior 10 days. Today we got both types of expansion.
The chart shows where I figured some support and resistance levels, particularly the gap fill level of 9496 (the dotted blue line starting at the beginning of "Today"), and the S/R level of 9477-9479, which was created yesterday. We had a triple header in news due out at 10:00 (source: econoday) and it jolted the market pretty good with jerks in both directions. The news was actually "good" but for technical trading we don't really care if the news is "good" or "bad". It is the reaction to the news that we need to see. The market made a double top, which was a high for the day at that point and then proceeded to sell-off pretty quickly, and deeply. It made a LL (lower low) than the preceeding swing, as marked on the chart. Picture in your mind a move from a HH to a LL as an "outside bearish" bar on the daily chart with all the price action to the left, in between that HH and LL as prior days. What we expect from such a pattern is for a LH to form in the pullback, which would be shortable. If price continued higher past the point of a potential LH I'd next look for a triple top to form (we already had the double top). The ideal place for a LH to form here is the old gap fill of 9537. It didn't oblige. It did make the LH however and then took out that low. Technically we had a confirmed top in place, regardless how "good" the news was. Traders express their opinions with their wallets, not meaningless verbal sparring like on CNBC. Trying to interpret the news as good or bad for the market (on an intraday time-frame) is something I don't care to even try.
The first place I looked to short was the current gap fill of 9496 (blue line) as price broke under it and retested it from the bottom. Smaller timeframe entry charts show this much clearer. A second place was right under the 9477-9479 S/R band. The pullback came to within 3 ticks of it. When it gets within the range of your stop-loss parameters you have to act if you saw this as an entry (this is my chart, not yours). You can't expect perfect pullbacks so you can't be a "dick for a tick" (No, I did not make up that term. No offense). We don't know how far the market will move. Today looked wonderful in hindsight after you entered. So you just have to manage the trade best you can. But you have to get in first. The support/resistance levels shown here are relatively easy to compute (but can take some time) and work pretty well. The gap fill level is always a gem.