Here is another example of how channel lines can be used to trade consolidation. Normally I would be waiting for price to exceed the line and then fail. This short entry was higher risk but has paid out so far.
A significant amount of what I was taught relates how to develop a workable and accurate "market concept". Prior to the open of the S&P market, we review specific data including combined OI and Volume on a daily time frame. This allows us to make a contingent forecast or "game plan". This data can be obtained directly from the exchange (read the daily bulletin) or one can get the data distributed by a third party (like Esignal for instance) The Esignal symbols are ES #OI and ES #V for daily data. In order to make use of the data one has to learn what constitutes low, average and high levels of daily volume and Open Interest. Evaluating the data is relatively straightforward. In a trending bull market, daily volume and OI are likely to trend upward as well. In addition, price will tend to advance even on pullbacks of OI & daily volume. As the trend matures or reaches extremes, pullbacks in volume or OI can signal impending corrections or even the end of a trend move. I mention it here because I use this information as a backdrop for my own daily trading plan Attached you will see a chart of daily "Open Interest".
Thanks for your kind words As we get ready to start the day (Thurs 14 May 2009) we see the following VAH = 889 VAL = 882 Early report include Core PPI Init Claims Open Interest & Daily Volume were both "up" yesterday 60 Min chart of $DJX shows a correction off the recent highs (see attached chart) Yesterday we trended down and closed slightly off the lows
and the 60 min chart of the $DJX As can be seen we added a new horizontal support line at the bottom of this chart.
Having some technical difficulties in my office today, so while the IT guys handle that I will outline the early morning action Evaluating the pre-market data, we looked for a move down (we opened "in value") to test the lower bound of value at 882. We got that test and entered long at 882. We took small heat down to 880.50. We took 5 pts before technical difficulties took us out. We noticed that Goldman was a seller on the open. At the turn, they were on the phone looking to buy them back. When this happens (a size player gets on the wrong side) they generally come back as a "quiet" buyer or seller to minimize the impact of their decision. That is to say, they try to buy or sell them back without driving the market against them. When that happens it makes it easy for you IF you are on the right side. You just hold and watch the screen. We are just about ready to go again, so this will be my last post until after the bell.
I think we will move off in a different direction this evening. First, we will talk briefly about options expiry. As regards the S&P contract, funds and specs tend to want to manipulate the index from about Tues to Expiry Friday. They want to move the index in a direction that permits them to pay out less or to maximize their "investment" (aka inventory). One can anticipate this by analyzing the open interest (which is why I brought it up in the previous posts). Information exists on how to do this (there are several approaches) and we invite interested traders to begin the process on their own by reviewing the available literature. Also by implication one can see how the market tends to rally up to a point just prior to the options expiry, then just coincidentally it corrects back down in the days just prior to expiration. The way we characterize this is that it is a "tug-of-war" between those who have bought premium and those who have sold it. One should always monitor the put-call ratio to get an idea of which way it is trending. There are a number of symbols offered by Esignal including $PC-ST which we use intraday.
Additional comment about today's action As readers know, we anticipated a move down to test previous Value Area Low at 882. Taking the trade we monitored the Cash Dow and watched the move continue a little further down before correcting back up. The wiggle from 882 down to 880.50 is not unusual. In this market we favor scaling out. Also we advise traders that position sizing matters greatly. Knowing what we know now, we would not be trading less than 12 contracts, and we would be scaling out at 2, 3, 5, 7, and 10, leaving 2 contracts to run. In current volatility we suggest scaling the last two contracts at 13 to 15 pts, leaving the last contract to run to end of session. This is how we would be approaching position sizing. Generally speaking we terminate open positions when the cash market closes. Those capable of critical analysis can quickly determine that trading for a few ticks doesn't work. Simply put, a retail trader cannot overcome expenses that way. In fact, to make a good living, one has to capture as many outlier trades as possible as they are the difference between a decent year and a great year.