TimePricePattern

TIME, PRICE AND PATTERNS IN E-MINI

SEMINAR ON Jan. 14, 2006

BY NATURUS (POLLY DAMPIER)

© 2005, 2006 Entire contents copyright Naturus Inc. This material may not be copied and reproduced in any form without permission

INTRODUCTION Importance of Time, Price and Pattern

A trading signal needs three key elements: Time, Price and Pattern. When all three come together, a good trading signal is given. The purpose is to improve your timing for entering the trade, which will improve your  trading success. We are discussing this approach for intra-day trading, but it is helpful in all markets, and across all time periods. We mainly look for the time when the market should react, the  price level the market needs for a reversal or a breakout to occur, and what the market has to do confirm the trade. We are a re looking for all three key elements; eleme nts; missing one will make our trading less successful.

TIME Tracking the time when reversal/breakout should occur is useful in eliminating bad signals. Some traders will think that the market must reverse on every signal time, which is not true. Instead, the market will reverse the current trend a high percentage of the time,  but not always. A smaller percentage of the time, the market will continue its direction after its consolidation or a very minor pull back. b ack.

PRICE Once the time has been identified, the next thing to do is looking for the price. If the market is making a new high/low, or if a trading range market is in the BUY/SELL level, then the second component of a trade signal is given.

PATTERN Once we have Time and Price working together, final step to go is we are looking for   pattern. We need to identify specific price patterns which often occur during reversal times. These patterns can be used to confirm the market reversal or market continuation. When, and only when, these three key elements are working together, is a good trading  signal is generated .

 © Naturus Inc. This material material may not be copied and and reproduced in any form without without permission.

© 2005, 2006 Entire contents copyright Naturus Inc. This material may not be copied and reproduced in any form without permission

I. TIME: Every trading day, there are total 14 time periods we need to be concerned with. But only 8 time periods the market in general tends to consistently turn or reverse. These Key Reversal Times are as follows: a) 9:50 – 10:10; b) 10:25 – 10:35; c) 11:15 – 11:30; d) 12:00 – 12:15; e) 1:15 – 1:30; f) 2:15 – 2:30; g) 3:00; h) 3:30. All times are stated using Easter Standard Time 1. 9:50-10:10 EST . This is the first of the eight reversal times, and it is one of the most significant. That is because first 20 minutes after market opens, most premarket orders are settle down, and market tends to form its first hour trading range. Often if market moves up into this reversal time zone, the price will either  stall or completely reverse and head lower. The same is true for the opposite opp osite direction. Look for gaps to get filled during this reversal time period. If ES remains stable during this period, it usually remains stable until next reversal time.

2. 10:25-10:35 EST. This is the second reversal time. By the time this period comes along, the market will have already revealed its true bias for the morning, making sound trading signals more more reliable. A market moving down into this reversal time zone will tend to either stall or reverse back to the upside. If it is moving up into this time zone, will often halt its advance or reverse and head lower. If the market breaks out from its range during this period, it is likely to take off in a larger movement.

3. 11:15-11:30 EST . This reversal time tends to do two very important things. Firstly, it tends to resist the prevailing trend preceding it, just like all the other  reversal periods. Secondly, this reversal time is the beginn ing of mid-day deadzone, when many traders are encouraged to take a break or at least to trade very lightly. “Trouble timing.”

4. 12:00-12:15 EST. This time is a minor reversal period to be most important on days. Usually it is a trendless or directionless period. It could g o either direction, which we called consolidation, especially after market has a big movement.

 © Naturus Inc. This material material may not be copied and and reproduced in any form without without permission.

© 2005, 2006 Entire contents copyright Naturus Inc. This material may not be copied and reproduced in any form without permission

5. 1:15-1:30 EST . This is also one of the minor reversal periods, but its consistency is very high. The retests of prior tops and bottoms often show up in this time  period. 6. 2:15-2:30 EST . This time period puts an end of the mid-day dead-zone period, Sometime we treat this period as second opening o pening for the market. After this reversal period, market often resumes their original up or down trends shortly.

7. 3:00-3:15 EST. Bond market closes on 3 pm often give a relief to equity market. Usually there is a counter trend movement during this time.

8. 3:30 EST. this time often reverses any movement that starts before before 3. After this reversal period, market often has last substantial confusion of activity due to last half hour trading before market closes, which we called the “PIKER RUN”.

(The above chart is 5 mins chart on Sept. 13, 2005)

 © Naturus Inc. This material material may not be copied and and reproduced in any form without without permission.

© 2005, 2006 Entire contents copyright Naturus Inc. This material may not be copied and reproduced in any form without permission

II. PRICE

1. Open reversal game play at first 60 minutes after open. Every day, as soon as market opens, ES gives you an opening price. Opening price is key level for setting first hour trading range. Open reversal game players will use opening  price as a central line to buy or sell. When price trades above opening price one or two ticks, those players will wait for market to hit top target to go short, or when price trades  below opening price one or two ticks, they will wait for market to hit bottom target to go long. Usually when price hit top or bottom, time is close to first reversal time zone. If their positions are stopped out, they reverse their positions as soon as market pulls back. Often market will go in the direction that stopped them out for the rest of the morning trading session.

 © Naturus Inc. This material material may not be copied and and reproduced in any form without without permission.

© 2005, 2006 Entire contents copyright Naturus Inc. This material may not be copied and reproduced in any form without permission

Above chart is 5min chart on Sept. 8. ES gapped up at open at 1239.50 level. It went down first to fill its gap and hit its open reversal game bottom target at 1237.50 level. Gap closed and those open reversal game players all went long at 1237.50 level. When  price approached to opening price area, they locked their half position and waited for   price to breakout its opening price for one or two ticks. If ES did, they focus on open reversal game top target at 1241.50 1241.5 0 level for locking all their profit. If not, they will sell their position at market right away. Market often sets up 4-5 points for first hour trading range with opening price as the base  point.

 © Naturus Inc. This material material may not be copied and and reproduced in any form without without permission.

© 2005, 2006 Entire contents copyright Naturus Inc. This material may not be copied and reproduced in any form without permission

2. First hour Range expansion First hour trading range is very important for rest of day trading. Opening price acts as a live pivot point, ES moves back and forth around it to set up first 30mins’ high and low and based on 30mins range to do its extension to set up first hour range.

How to recognize breakout In a Range breakout, usually price moves exceed its first hour’s high for one and half   points or more; either the price continues moving up or pulls back above first hour’s high and then stops falling. In this situation, range breakout has been confirmed.

How to trade breakout: Some traders will use stop buy order at two ticks above first hour’s high, and use stop loss at low level of a previous breakout candle or opening price.

How to measure target: On a breakout, the price usually will extend itself for at least 127.2% of first hour range, in this case about 1.5 points, or 1245.50. Maximum extension could be double first hour  range length. In above chart case, 1247.25 is our exit target in the morning session.  © Naturus Inc. This material material may not be copied and and reproduced in any form without without permission.

© 2005, 2006 Entire contents copyright Naturus Inc. This material may not be copied and reproduced in any form without permission

3. Range trading  After first hour trading range has been set up , sometime market doesn’t intend to do any  breakout movement. Especially it had a strong trend in the previous day. Market just moves back and forth within its first hour range. If we see this kind of movement, we can use range trading method. We look for range top (resistance level) to go short whe n market shows its strength and look for range bo ttom (support level) to buy on market shows weakness.

 © Naturus Inc. This material material may not be copied and and reproduced in any form without without permission.

© 2005, 2006 Entire contents copyright Naturus Inc. This material may not be copied and reproduced in any form without permission

4. Strong trend day  Sometimes, market doesn’t move very much and trades within a very narrow range for  couple of days after it has a strong up run or down run. We say the market is in contraction mode. Sooner or later, market will move out of this contraction and make a huge movement again. We call that strong movement is market on expansion mode. When we see market having NR4 or doji pattern, next day we should expect market could have a very strong movement in reversal direction.

The characteristic of a trend day : A trend day occurs when there is an expansion in the daily trading range and the open and close are near the opposite ends of the day’s range. It can happen in either the same or the opposite direction to the prevailing trend on daily charts.

When we see a trend day, the method we use is to buy on strength (in an up trend) and sell on weakness (in a down trend). Trading strategies on trend day: A breakout range or intraday trend-following method can best capture a trend day.

1. Conservative way: If there is an uptrend day, we can use 20/40ema lines as guide direction. If 20/40ema lines move up, and 20ema line is above 40ema line. As long as those two lines stay up, we always wait for price to pullback into 20/40ema line level to do our long entry with a properly protective stop below. If  20/40ema lines point down, and 40ema line is above 20ema line, we always wait for the price to bounce into 20/40ema line to do our short entry with a protective stop above. 2. Aggressive way: Using early entry. Toby Crabel stated this as a large price movement in one direction within the first 15mins of the opening. The probability p robability of continuation is extremely high. Once one or two extremely large 5-minute bars appear within the first 15 minutes, a trader must be nimble enough to enter on the next “pause” that usually follow. With this strategy, the initial risk can appear to  be high. But sometimes reward also will be good.

3. Breakout of the Early-morning trading range. Wait for morning range to be established after first hour, and then place a buy order above the morning’s high and a sell order below the morning’s low. 4. One of the easiest and more popular ways to exit is MOC (Market-on-Close). Position or swing traders could carry their position into next morning and close on next day’s open. As a daytrader, we do not carry position overnight. This eliminates overnight risk and reduces margin requirements.  © Naturus Inc. This material material may not be copied and and reproduced in any form without without permission.

© 2005, 2006 Entire contents copyright Naturus Inc. This material may not be copied and reproduced in any form without permission

Below charts show the daily S&P 500 50 0 (SPX). The marked days were double tops, with narrow range and doji, strong reversal signals. In b oth cases the next day was a strong trend day.

Below an intra-day chart ES 5min chart on Sept 16, 2005 showing a strong downtrend day.

 © Naturus Inc. This material material may not be copied and and reproduced in any form without without permission.

© 2005, 2006 Entire contents copyright Naturus Inc. This material may not be copied and reproduced in any form without permission

The below chart is a strong uptrend day on Nov 11-12, 2004, following a NR7 day.

 © Naturus Inc. This material material may not be copied and and reproduced in any form without without permission.

© 2005, 2006 Entire contents copyright Naturus Inc. This material may not be copied and reproduced in any form without permission

III. PATTERNS Market repeats its trading patterns over and over. This has been noticed since in the early 1900s, Charles Dow gave birth to technical analysis.

1. RECTANGLE PATTERN This pattern can be seen often when market is in consolidation mode, especially after  market has a huge run up or down. When market is on the top or bottom, we also will see this pattern.

TRADING SUPPORT AND RESISTANCE Rules :

Support and Resistance areas establish a trading range (as opposed to a trend) and many traders look for opportunities to go short near the top of the range ( the resistance area) and cover or go long near the bottom of the range (the support area). This can be a profitable strategy, but bu t you must protect yourself against breakouts – either  up or down – from the trading range. 1. Place your protective stops when your position approaches support and resistance zones

 © Naturus Inc. This material material may not be copied and and reproduced in any form without without permission.

© 2005, 2006 Entire contents copyright Naturus Inc. This material may not be copied and reproduced in any form without permission

2. Support and Resistance are more important on long-term charts than on shortterm charts. 3. A true upside breakout should not be followed by a pullback into the range 4. Most of breakouts from trading ranges are false breakouts. True breakouts are confirmed by heavy volume, while false breakouts tend to have hav e light volume. It should be confirmed when technical indicators reach new extreme highs or lows in the directions of the trend, while false breakouts are often marked by divergences between price and indicators.

 © Naturus Inc. This material material may not be copied and and reproduced in any form without without permission.

© 2005, 2006 Entire contents copyright Naturus Inc. This material may not be copied and reproduced in any form without permission

2. ASCENDING TRIANGLE PATTERN Ascending triangle pattern is generally considered a bullish pattern. The top part of the triangle appears flat, while the bottom part of the the triangle has an upward slant. Draw a horizontal line through two or more price peaks, then draw ascending line through two or  more higher lows. When we see this pattern, we need price give us a breakout confirmation before we can take a trade.

Confirmation of Breakout: Price has to close above that horizontal line and next candle price must trade above or at horizontal line. Above chart is 5 min chart of ES on Sept 13. 2005.

 © Naturus Inc. This material material may not be copied and and reproduced in any form without without permission.

© 2005, 2006 Entire contents copyright Naturus Inc. This material may not be copied and reproduced in any form without permission

3. INVERTED HEAD & SHOULDERS PATTERN This inverted head and shoulders pattern p attern is typically seen when market is in downtrends. It indicates a bullish reversal of the previous down trend. What you need to know about this pattern is the volume. Left shoulder’s area should be accompanied by an increase in volume. The head should be made on lighter volume. But the rally from the head should show greater volume than the rally from the left shoulder. The right shoulder’s low should see the lightest volume of all. When the market rallies thought the neckline, a big increase in volume should be seen.

Confirmation of Breakout: Price has to close above the neckline line and next candle price must trade above or at neckline line too.

How to trade: GO LONG at that breakout candle closing price with stop loss two ticks below low of the right shoulder.

The above chart is ES 5min chart on Sept 7, 2005

 © Naturus Inc. This material material may not be copied and and reproduced in any form without without permission.

© 2005, 2006 Entire contents copyright Naturus Inc. This material may not be copied and reproduced in any form without permission

4. BULL FLAG IN AN UPTREND We can often see bull flag pattern in intra-day trading. This is a continuation pattern. Usually this pattern lets traders think market is on pullback (to shake out the most recent  buyers) before the greater trend (breakout) starts again.

Before we make a trade, we want to make sure the trend lines are as close to parallel as can be. We want to see confirmation of the breakout first before we put on a trade.

Confirmation to breakout: Price must breakout bull flag pattern (top band of downtrend channel), and close above that pattern. Later this breakout level has to become a strong support level that stops  price pull backs.

How to trade: GO LONG one or two ticks above abov e breakout level and stop loss two ticks below a  previous candle, prior to the breakout candle.

 © Naturus Inc. This material material may not be copied and and reproduced in any form without without permission.

© 2005, 2006 Entire contents copyright Naturus Inc. This material may not be copied and reproduced in any form without permission

5. DOUBLE BOTTOM A double bottom pattern occurs when the price has made one bottom and risen a considerable distance, then falls again to a pproximately the same level as the first bottom. I see this pattern as bullish. During intra-day trading, we often see this pattern, bu t often price on second bottom will not be at same level as one at first bottom. I often say the market is in testing mode. When market makes first bottom and push price away from that bottom, market wants to  pullback into that bottom to test whether that is a true support level. If it is a true support level, no matter how far stop running down d own at second bottom area, area , price will immediately  push back up into the range.

How to trade: The same way to trade as trade on bull flag. Look for a breakout from the resistance level. Aggressive traders may be tempted to go long after price moves away from second part of bottom, but with tight stops to protect aga inst a continuation of the down move.

 © Naturus Inc. This material material may not be copied and and reproduced in any form without without permission.

© 2005, 2006 Entire contents copyright Naturus Inc. This material may not be copied and reproduced in any form without permission

6. DESCENDING TRIANGLE Descending triangle pattern is considered as bearish pattern. We often see this pattern when market is on its up run and makes its top. After market makes its high, it starts to loss its steam and forms lower higher each time. Unlike the ascending triangle, this time the bo ttom part of the triangle appears flat and the tops part of the triangle has a downward slant.

How to trade: First breakdown candle needs to close below support line. GO SHORT on the second  bounce candle with stop loss two or three ticks above the support level.

 © Naturus Inc. This material material may not be copied and and reproduced in any form without without permission.

© 2005, 2006 Entire contents copyright Naturus Inc. This material may not be copied and reproduced in any form without permission

7. HEAD & SHOULDERS The head and shoulders pattern is one of the more complex patterns to identify. Look at  below chart (Aug.24, 5 min chart on ES). There are two left shoulders and two right shoulders. But no matter how many shoulders, we only need to see one head. The neckline for this pattern should be drawn from the beginning of the right shoulder  through to the left shoulder. When the price breaks the neckline, short has been confirmed.

 © Naturus Inc. This material material may not be copied and and reproduced in any form without without permission.

© 2005, 2006 Entire contents copyright Naturus Inc. This material may not be copied and reproduced in any form without permission

8. DOUBLE TOPS Double top pattern occurs when the price has made one high and drops back to its key support level, then buyers push price back into the first high. Often odds will try to trade against second high.

 © Naturus Inc. This material material may not be copied and and reproduced in any form without without permission.

© 2005, 2006 Entire contents copyright Naturus Inc. This material may not be copied and reproduced in any form without permission

9. BEAR FLAGS This is the reverse of the Bull Flag discussed earlier. Higher tops and higher bottoms make up a Bear flag pattern. This pattern often forms when market is in down trend. We want to make sure the trend lines are as close to parallel as can be, also this pattern has a tendency to slope against the trend.

 © Naturus Inc. This material material may not be copied and and reproduced in any form without without permission.