5197587commodities

A Technician’s Approach to Day and Swing Trading

g n i r P . J Mart in www.pring.com

Definition of Technical Analysis: The art of identifying a price trend reversal at a relatively early stage and riding on that trend until….

…..the weight of the evidence shows or proves that the trend has reversed.

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The hopes and fears of all market participants are reflected in one thing…

….the price !!

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Technical analysis assumes that prices move in trends.

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Trends have a tendency to perpetuate.

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Prices in any freely traded market are determined by the attitude of all market participants to the underlying fundamentals.

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“A trend is a trend is a trend.”

Always assume the prevailing trend is in existence until proven otherwise.

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There is no known technique for determining the duration and exact magnitude of a price move.

We can only recognize a change in direction.

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It doesn’t matter what time frame you are following... …the principles of technical analysis remain constant.

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The only difference is…

…the longer the time frame, the greater the significance of any given trend reversal.

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The principal difference between day and swing trading and other forms of trading is the time frame.

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It doesn’t matter what security you are following... …the principles of technical analysis remain constant.

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Look for the weight of the evidence; (several indicators, to indicate a reversal.)

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In technical analysis we are dealing in probabilities, never certainties.

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Always look down before you look up!!

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The first trading objective is to preserve capital.

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#1 Trading Rule… Cut losses quickly, and let profits run.

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First trade has a 50% loss!

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Next trade has a 50% gain

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Next 3 trades make 10% each

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Next 4 trades make 80%

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Still not back to break even

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1.Peak and trough analysis 2.Support and resistance 3. Trendlines

The Indicators

4. Placing stops 5. One and two bar price patterns 6. Brokers as a leading market indicator

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1. Peak and Trough Analysis

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Rising peaks and troughs is bullish

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Rally fails to make a new high.

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B Declining peaks and troughs now signaled.

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Rising peaks and troughs now signaled.

D

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Price falls below breakout point, but rising peaks and troughs are still intact. www.pring.com

Rising peaks are still intact . . .

X

Y

. . . but a new low here

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Y

Rising peaks and troughs now broken.

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New high!

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What constitutes a legitimate peak or trough?

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Retracement should be about 1/3 - 2/3 of 100% of the advance the previous move.

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Retracement far less than 1/3 - 2/3 of the previous rally.

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1/3 or more of time taken to form the rally.

100% www.pring.com

S&P Composite S & P Composite 15-minute bar High

Low 6-wk MA Bear ( Inverted)

S & P Comp(6MA) 13-wk ROC

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S&P Composite S & P Composite 15-minute bar New reference high

Bear ( Inverted) 6-wk MA

S & P Comp(6MA) 13-wk ROC

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S&P Composite S & P Composite 15-minute bar Still intact

Bear ( Inverted) 6-wk MA

S & P Comp(6MA) 13-wk ROC

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S&P Composite S & P Composite 15-minute bar Still intact

Bear ( Inverted) 6-wk MA

S & P Comp(6MA) 13-wk ROC

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S&P Composite S & P Composite 15-minute bar

Bear ( Inverted) 6-wk MA Downtrend continues

S & P Comp(6MA) 13-wk ROC

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S&P Composite S & P Composite 15-minute bar

Bear ( Inverted) 6-wk MA New reference high

S & P Comp(6MA) 13-wk ROC

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S&P Composite S & P Composite 15-minute bar

Bear ( Inverted) 6-wk MA Downtrend still intact

S & P Comp(6MA) 13-wk ROC

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S&P Composite S & P Composite 15-minute bar

Bear ( Inverted) 6-wk MA

Rally meets resistance

S & P Comp(6MA) 13-wk ROC

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S&P Composite S & P Composite 15-minute bar

Bear ( Inverted) 6-wk MA Possible reference low

S & P Comp(6MA) 13-wk ROC

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S&P Composite S & P Composite 15-minute bar

Bear ( Inverted) 6-wk MA

S & P Comp(6MA) 13-wk ROC Breakout above previous high….

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S&P Composite S & P Composite 15-minute bar

Bear ( Inverted) 6-wk MA

S & P Comp(6MA) 13-wk ROC …and this one.

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S&P Composite S & P Composite 15-minute bar

Bear ( Inverted) 6-wk MA

S & P Comp(6MA) 13-wk ROC New reference low

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S&P Composite S & P Composite 15-minute bar

Bear ( Inverted) 6-wk MA

S & P Comp(6MA) 13-wk ROC New downtrend signaled

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S&P Composite S & P Composite 15-minute bar

Bear ( Inverted) 6-wk MA

S & P Comp(6MA) 13-wk ROC

Neutral trend

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S&P Composite S & P Composite 15-minute bar

Bear ( Inverted) 6-wk MA

S & P Comp(6MA) 13-wk ROC

Above previous high Below previous low

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S&P Composite S & P Composite 15-minute bar

Bear ( Inverted) 6-wk MA Two benchmarks

S & P Comp(6MA) 13-wk ROC

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S&P Composite S & P Composite 15-minute bar

Bear ( Inverted) 6-wk MA

S & P Comp(6MA) 13-wk ROC

Uptrend confirmed

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S&P Composite S & P Composite 15-minute bar

Sell signal

Bear ( Inverted) 6-wk MA

S & P Comp(6MA) 13-wk ROC

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2. Support and Resistance

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"Support" and "Resistance" are terms that are often misused!

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“Support” is where a declining trend can be expected to halt, temporarily, due to a concentration of demand.

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“Resistance” is where an advancing trend can be expected to halt, temporarily, due to a concentration of supply.

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Support and resistance areas are not predictors if where prices will reverse, but merely indicate possible, or probable, points.

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Support

Previous low often becomes support www.pring.com

1. Previous low is a good point to expect support.

Support has been violated

A

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A

B

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A New support level

B C www.pring.com

2. Support reverses its role to resistance on the way back up.

A Resistance

B C www.pring.com

Previous support is now…

A

B C

…potential resistance www.pring.com

3. Resistance reverses its role to support on the way down.

A Support again

B C www.pring.com

Where are Support/Resistance Points Likely to Develop? 1. Previous highs and lows. 2.The upper and lower area of gaps often represent crucial support / resistance pivotal points. 3. Retracement points for previous moves; e.g., 50% Fibonacci retracement levels, etc. . www.pring.com

3. Trendlines

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Down Trendline Connect first peak to . . . . . . second peak

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Down Trendline

Breakout point is the buy signal.

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Down Trendline This line does not touch any peaks, and is not a valid trendline.

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Up Trendline

To the second low . . . Connect the final low . . . www.pring.com

Up Trendline

Trendline break is the sell signal.

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Up Trendline

Line is invalid because it only touches one point. www.pring.com

Rules for Determining Significance of Trendlines 1. The longer the line the greater the trend being measured and the greater the significance. 2. The more times a line has been touched or approached the greater its significance as a dynamic support resistance zone. 3. The steeper the angle of ascent or descent the less sustainable the trend and therefore the less significant the line. www.pring.com

4.Placing Stops

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A key trading rule is always run scared.

The number one decision when entering a trade is to know where you are going to get out if the market goes against you.

That means setting stops ahead of time and changing them when appropriate.

Best place to set stops is above resistance or below support…

The order is executed immediately the price is touched and there is no opportunity to second guess.

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The disadvantage is that locals and market makers can "go" for your stop.

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Advantages of placing Stops 1. Mentally preparing for the worst.

2. Decision more likely to be made with a more balanced judgment.

3. A correctly placed stop is usually executed at a better price. www.pring.com

For liquidation of long positions, the best point to place a sell stop is below support and for covering a short one above resistance.

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December 1997 Corn 10-minute bar

Do not place stops at support

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December 1997 Corn 10-minute bar

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December 1997 Corn 10-minute bar

Place them below support

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December 1997 Corn 10-minute bar S

S H

Place them above resistance

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December 1997 Corn 10-minute bar

..but just in case you are wrong place a sell stop below support.

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December 1997 Corn 10-minute bar Break takes place just before the session close.

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December 1997 Corn 10-minute bar

Breakout

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December 1997 Corn 10-minute bar

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December 1997 Corn 10-minute bar Enter partial profit taking stop at level of previous high.

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December 1997 Corn 10-minute bar Start of gap also represents resistance.

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December 1997 Corn 10-minute bar Price reverses at resistance.

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5.One and Two Bar Price Patterns

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All one and two bar price patterns must be preceded by a short-term up or down trend.

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One and two bar patterns are usually short-term reversal phenomena.

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These patterns indicate exhaustion, where market psychology has reached a short-term extreme.

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Outside bars

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Outside bars are reversal patterns that indicate a change in sentiment.

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Encompasses trading range of previous bar and then some!!

We want the close to be in the lower end of the trading range.

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Close should be in the upper part of the range.

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Measuring the Significance of Outside Bars 1. The wider the bar and the wider the difference between the open and close the better.

2. The sharper the preceding rally (reaction for a down reversal) the better.

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S&P Composite 5-minute bar Outside bar

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S&P Composite 5-minute bar

Outside bar failure

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Dollar/franc 30-minute “Outside bar”

Outside bar www.pring.com

Two Bar Reversals

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Two bar reversals indicate a dramatic change in sentiment.

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Two Bar Reversal Closes near the high Sharp rally

First bar opens near the low.

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Two Bar Reversal

Second bar opens near the high

Closes near the low

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Two Bar Reversal Resistance zone The lower the resistance zone the better.

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Two Bar Reversal Closes near high

Opens near high

Closes near low

The higher the Opens near low support line the better.

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Dollar/franc Two Bar Reversal Dollar/franc Daily Two bar reversal

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December 2006 British Pound IMM 10-minute bar

False breakout

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December 2006 British Pound IMM Hourly bar

Two bar reversal signals false breakout

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S&P Composite 5-minute bar

Price closes near its low and that of the previous bar.

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Pinocchio Bars

Pinocchio bars give us a false impression of what is really going on.

Pinocchio Characteristics

1. Intrabar trading pushes the price through support or resistance but not the open or close.

2. Generally speaking, the longer the nose the stronger the signal.

Pinocchio Bars False impression of strength

Most of the trading range is above the open and close.

Pinocchio Bars

False impression of strength

March 1997 S&P 10-minute bar

Pinocchio bar

March 1997 S&P 10-minute bar

Most of bar outside of the recent trading range

Crude Oil Daily Crude Oil Daily Strong outside day Confirmation Pinocchio bar

Support line

March 1997 S&P 10-minute bar Pinocchio peak

March 1997 S&P 10-minute bar

Exhaustion = Resistance

6. Brokers are a leading stock market indicator.

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Why Brokers lead the Market 1. Stock market discounts corporate profits. 2. Brokers get their profits from financial markets. 3. When markets are rising….. a. There is more volume i.e. more commissions. b. Falling interest rates mean wider margins on bond and equity inventory.. c. More underwritings as companies come to market. www.pring.com

S&P vs. Amex Brokers Index S&P Composite

Brokers

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S&P Composite

Merrill Lynch

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Merrill Lynch Vs S&P Composite

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Merrill Lynch Vs S&P Composite

Joint breakout

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Merrill Lynch Vs S&P Composite

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Merrill Lynch Vs S&P Composite

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Merrill Lynch Vs S&P Composite

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Merrill Lynch Vs S&P Composite

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Merrill Lynch 3-month breakout

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The End

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