I think the title speaks for itself. It’s especially important to understand set ups like this in today’s environment.

This is part one and next we’ll discuss playing intraday 1-2-3’s and minor highs and lows.  I consider all these "patterns within patterns" as often these smaller formations will develop within a larger chart pattern formation.

A chart is worth a 1000 words…these are Dow reversals off 52 week high.  I’m not one to pick tops (or bottoms) but if you are going to do it…this is the "right" way to pick tops and set up shorts off a trending market.

- Raghee

I read about Dow Theory years ago and with all the new highs and lows setting in across the markets I trade, I seem to be thinking about quite often these days.

There are six major principles of Dow Theory and my own trading has been inspired and guided by four of the rules.

ONE:  The market has three movements.

TWO:  Trends have three phases

THREE:  The markets discounts all news

FOUR:  Trends exist until definitive signals prove that they have ended

I am going to discuss these four principles in detail at the upcoming Chart Pattern Trading webinar here at FXStreet this coming Tuesday.

If you use chart patterns and price action to decide on your trades, this is a presentation you need to watch.

- Raghee

I have been using this neat little web app for a few weeks now and I think I trust it enough to start doing some constructive posting using it.  You can check it out at http://www.twitter.com/ragheehorner

I’ll be posting quick trading ideas, thoughts, and set ups from time to time…however the Twitter application allows only very short posts of just 140 characters which is great for quick messages but you’re going to have to have a basic understanding of how my trade entries to follow what I’m doing…however no fear! you can learn more about what I do at the weekly Chart Pattern Trading webinar right here at FXStreet each Tuesday at 11:00am EST.  Oh yeah, and it’s free.

Also, if you are new to trading and/or want to learn more about my entries and set ups, feel free to check out the transcript from my January presentation called Four Step Trading: Forex.  You can find it here: 

http://transcripts.fxstreet.com/2008/01/raghee-horners.html

- Raghee

The U.S. Dollar has been bouncing as of late.  And let’s for the sake of clarity discuss briefly the difference between a bounce and a rally.  It’s all in the direction of the Wave.

If the Wave is three o’clock or sideways, then a move higher within that context is simply a bounce.

If the Wave is two to four o’clock, again, just a bounce.

I will refer to a move higher as a rally when the Wave angle is twelve to two o’clock and I will refer to a move lower as a sell-off when the Wave angle is four to six.

Even I will sometimes use these interchangeably but it’s not right and I am writing this as much to remind myself as to you…

So like i said, the dollar had no choice so let’s look at why:

The fact that the U.S. Dollar Index fell to the support of the channel it’s been trading in is certainly reason enough to think that buyers might support the level.  Add to that the two to four o’clock Wave and there is market cycle confirmation of a range-bound market.  I think the main factor is what I have been calling the floor and the basement.

Prices have reached such levels as to attract bargain hunters.  Consider that if we break the "first floor" the basement is next and below that, new all time lows.

I also would factor in the 1.6000 level on the EUR/USD.  This level in the fiber is certainly a major psych level that would be resistance.  And even on the break up through the "000" (TRIPLE zero!) level there has to be a test to confirm that what was once resistance, 1.6000, is now support.  This did not happen so the "000" sent prices lower as sellers push prices lower from this level.  Never assume that a break such as this is automatically support.  Big mistake.

- Raghee

OK, yes I just saw Kung Fu Panda, or "Panda Fu" as my little four year old buddie calls it.

And Fibonacci is awesome, but I realize that because this tools it oh-so-very subjective that many people dismiss it.  NOT because they think it doesn’t yield insightful analysis but because it’s just so frustration as you are first learning how to use it.

I learned about 50% Retracements first and used that exclusively for a while. (hey remember I was doing charts by hand when I first started trading so they were just easy to find!) I later got more involved in the entire series once technology helped out with the heavy lifting.  I use quite a few levels and I talk about them in this video.  In fact I even discussed setting these up during my latest online gig with IBFX.

I also used Fibo in my previous post of on the chart of the AUD/USD and received quite a few emails regarding it so I wanted to share a  quick intro;  it’s a beginning.  Fibonacci is amongst my favorite analysis tools - probably second only to my Wave - and I hope to discuss Fibos more here at the Chartology blog.

- Raghee

That’s almost word for word an the first line of an email I received. That makes me think two things, first, I have to bring my crystal ball back from the shop and second, maybe I need to stop giving out my email.

(kidding, kidding!  I love getting emails from traders and students, truly)

I don’t know when, where, and in what language I gave anyone the impression I pick tops or bottoms.  I will occasionally trade range-bound markets - shorting ceiling, buying floors.  But the idea that I will actively look for a short in an uptrend or a buy in a downtrend is the furthest thing from my mind…until I get an email like this.  (You see it feeds the "pig in the head". It gets the "pig" curious.  Hmmm, well since curiosity is a cat killer, is the pig any safer?)

I like to mock up different analysis scenarios on my charts.  Trader role playing…  So this is what I replied to the email and the charts I included.  Now keep in mind, even though I spend the first few sentences of my reply chastising this poor fellow (I’m going to leave that out), the analysis that I sent and am sharing here was serious, I wasn’t playing around.  IF I was a top and bottom picker, here’s how I would do it…

In this example, I am toying around with the idea of a Dow Theory reversal.  Ideally this pattern should rally to a 2 point perhaps at a Fibonacci or psychological number level and reverse lower.  Then leave a 3 point which could ideally (again) be at a Fibonacci or psychological number.  I like when the 3 point either make a 50% retracement or better yet a double bottom without going lower than the 1 point.  Add to that I prefer to see this set up take no less than ten trading days and no longer than 20 trading days to develop and trigger.

See even when playing "make believe" I specific about what I want!

Crude is an easier story to tell because it’s not really a top picking set ups at all.  Even though I was long the CL contract and still am long via call options and the USO, I have been very upfront about the 150 resistance and the psychological significance of it.  I have also discussed that current price action and the frequency of pullbacks to the Wave are the first steps into the distribution market cycle.  I think the likely scenario here is a two to four o’clock Wave.  For anyone looking for a Wave reversal short here, I don’t like the set up.  This is not the kind of rally that simply reverses in a "V" pattern.  It’s going to take some time to shake the buyers off the uptrend and that’s exactly what the distribution cycle does.

I should mention that when playing scenarios, be sure to have a scenario for both sides of the market.  Also, feel free to have multiple scenarios.  This way you are more likely to recognize and be prepared for the trades as it develops…in essence you have seen it already!

The AUD/USD had a really sweet Fibo on the daily.  And if you’re going to pick a top or bottom in any market, it’s best to do it off the daily.  I could have also done a mock up of a Dow Theory reversal but in the interest of simply diversifying the top picking approaches here I’m going with Fibonacci, extensions in this example.

The 1.618 was hit really solidly and left behind a good size wick.  The level is also further reinforced by the "50" pip level.  The AUD/USD and the U.S. Dollar Index have an inverse correlation but remember that the aussie is a "split personality" as it’s a comm-doll too.  That means factoring in the trend in gold.  Gold is still in an uptrend and trading above the Wave.  It’s also below 1000 and that’s going to be an important resistance level (again).  Last time we broke 1000, it was a short lived move and reversed and started the distribution cycle were in now.  Since the mid-March run through 1000 and the subsequent pullback, I’d say that there was a one month span where gold was in a downtrend (four to six o’clock Wave) from mid-April to mid-May.  Other than that, the Wave’s been two to four…distribution.

So there you have it.  but remember just because you can set the trade up doesn’t mean you should take it.

And by the way, the most realistic set up to me is the AUD/USD short…love that Fibo ceiling.

- Raghee

This is the playback of this week’s live webinar presentation that was
initially focused on hourly and daily volatility numbers and historical
tendencies that transitioned into a discussion of the crude oil drop,
dollar & Dow rally.

We had some technical difficulties with last week’s webinar so here’s the playback.  By the way, all of the webinar presentations are posted here at the Chartology blog so you can catch up and review at your leisure.  Don’t forget that you can catch the LIVE presentation each Tuesday at 11:00am EST right here at FXStreet.  Enjoy!

- Raghee

(This is pertinent to any market trader!)

My mom had just come back from Miami where she likes to shop for beads.
She makes beaded jewelry, much of which I wear and give as gifts, and
she handed me a small green jade blob.

Now realize the charts looked like it had fallen off the wrong side of the mountain and was down almost 200 points that session.
My mom always get phone calls from friends and family asking “What is
Raghee doing with this down market?” Her reply is the usually “she’s
short” or “she’s buying stocks that are on sale”. My mom has been
listening to me talk about the markets since I was 17 and a lot of it
has stuck with her. Every now and then I will look at my investments
and hey I’m human, it can bring you down. Luckily I snap out of it
pretty quickly and get to work, finding opportunities. For cryin’ out
loud: That’s my JOB!

I think she may have noticed that my “snapping out of it” was taking
a little longer and being a mom, did what she does best: Tell me
exactly what I need to hear.

“Even bears eat”.

She puts this small green blob of jade on my desk. I hadn’t quite
realized what it was or really what the heck she was talking about.
Apparently my expression said much and she repeated, “Even bears eat”.
And she walked out of the room. I’m shaking my head and finally the
small green jade blog came into focus.

Yup, once again, mom was right.

Are you looking for opportunity as the Dow sinks?  Are you looking at the stocks, you “wish list stocks” that you want to own?
The financial sector is like an out-going tide right now bringing
everything lower but there are companies that are worth buying and they
are on sale.

- Raghee