Wednesday 9 January 2013
Here is how we use the markets to find trades:
Developing activity is the best and most reliable source for understanding what the market is doing. The
information it provides can also lead to an edge in taking a position, long or short. Natural Gas provided
a classic example of how reading the developing market activity can lead to a trading opportunity. The
market always advertises set-ups. It is a matter of constantly searching for them. We should also add that
opportunities develop in all markets and over all time frames, regardless of the underlying futures. As always,
a chart is a chart
This is what caught our attention, as of 4 January. Price had previously found support in Aug-Sep 2012,
noted by extending a horizontal line to the right. On 2 January, there was a sharp break to the downside,
on increased volume, as price left behind a small trading range. The down draft did penetrate the lower
support line, but by the close there was a recovery to close mid-range the bar, indicating there were buyers
present on the lower portion of that day’s trade. There was a two-day recovery attempt, immediately
following, adding credence for that area as potential support.
The lines drawn between the swing highs and lows, starting at the October high, tell us that the trend is down,
and any position should be from the short side, to be in harmony with the market.
If you look at the high of the wide-range bar, it was where the acceleration lower began. Whenever you see
such a bar, with increased volume, it usually carries some significance. Observing the smaller ranges on the
rally attempt, we knew if the market were to retest the high of that wide-range bar, the range were smaller
and volume decreased, sellers would defend that high, and a short position would be indicated.
Here, the market is letting us know of a potential trade in advance of the event. All we need to do is find
confirmation that the market would fail at that level, once again. There is no need to guess, no need of moving
averages, RSI, MACD, etc, etc. Rather, the informative facts are generated by the market is that is needed.
We also know that buyers entered the market just under support, causing the close at just above the mid-point
of the bar. We cannot know ahead of time if it is simply short-covering, new buying, or a combination. That
wide range can possibly form another small trading range, something of which we cannot be certain, in advance,
but the potential is noted.
To see the entire article and entry chart on our web site, click on http://bit.ly/XOzIlI
