Tuesday, January 13, 2009

Fibonacci Placement

A reader asks:

Jamie, how to set initial target for stocks that open below the PDL, bases at the PDL, breaks and enters the previous day range, example - GS today (Jan. 13). It based below PDL, breaks PDL entering the previous day range, retests resistance (PDL) and moves up. What should be the target/s for these types of trades? Any pointers that I need to remember while taking these types of trades?


According to Trader-X guidelines, we normally look to see how a stock opens versus the PDH/PDL. For stocks that gap down and open outside of the previous day's trading range, we look to place the fibs. from the previous day high to the ORL (15 min. opening range low).

The GS chart above plots the fibs. as per the guideline. How is this useful? It shows that price consolidates between the PDL and the ORL for an hour before making a move higher. The proximity of the R-zone from the PDL gives pause because there is little room for error if price consolidates and/or reverses in the R-zone. Look at resistance levels within R-zone for preliminary targets. Downsloping 50 MA often acts as resistance as well, assuming you're trading off of the 15 minute timeframe.


In contrast to GS, POT opens inside the previous day's range, but breaches the PDL in early trade, before closing strong. Here we ignore the breach, even if price had closed weak, below PDL. Use the open to determine Fib. placement.

POT rallied up to the R-zone consolidated for a lengthy period of time. It set up NR7 for a B&B entry, but failed to close above resistance. I managed a pt. on the first half, but had to scratch the second half.

NQ futures trade - triangle BO.

11 comments:

PDT said...

Excellent post I was wondering about those type of trades today.

So for BTU and ACI you would plot from PDH to PDL and just ignore the open right?

What do you think of the 11:00am entry bar on BTU? Same thing for ACI. ACI actually looked like a C&H play... do you see it? Can you let me know why you would have passed on it?

And in reference to the POT trade. "It set up NR7 for a B&B entry, but failed to close above resistance. I managed a pt. on the first half, but had to scratch the second half."

By resistance you mean that the 12:30 bar's high failed to close above the 38% retracement mark and you gained a point from the break of the $76.00 base to to around $77.16. Is that correct? And what do you mean by the second half?

Thanks!!!

Jamie said...

PDT,
For BTU it's not really important beecause the open and PDL are very close in price. When I say open, I mean opening tick at 9:30 EST. So for ACI, even though the chart doesn't show a gap on 15 min., price opened lower that PDL.

On POT, that's correct, I took a partial after 1 pt. and sold the balance of my position at breakeven. My initial prelim. target was 2 pts. up to 50 fib. and downsloping 50 MA. Then I was hoping $77 would hold as support. However, the markets were making lower highs and so a lot of setups just fell over.

ACI too close to downsloping 50 MA. BTU has more distance but use it as prelim. target because it's rare to break through on the first test. You need big volume and BTU just didn't have enough volume expansion to support a break on the first test.

BulletAce said...

Hi Jamie,
I love your trading. But Im wondering about your POT trades, the 38% resistance is very close to your entry, not to mention current day high is also around the 38% mark which adds the pressure. I guess what Im trying to understand is that do we place price resistance(or support when we short) with less concern when we have a good setup entry(like your B&B and NRB).
And what about if the POT is a GAP down stock, will you still go through with the long?
Thanks.

Jamie said...

BulletAce,

I was looking at multiple timeframes of POT and I saw an inverse H&S type setup on 1 minute chart. This coincided perfectly with the NR7 on 15 minute timeframe so I took a chance. You're right about limited upside based on resistance and R-zone. However, knowing the caveats ahead of time we can take a target trade to resistance and sell half of the position. This ensures some profit even if resistance proves to be formidable as was the case here. I wouldn't do this on a sloppy base. The setup has to be near perfect in order to overcome resistance.

A gap fade is legit if it carves out a solid base, ideally a cup & handle type pattern.

Tyler said...

Jamie,

Thanks for the good post. I am glad to see you trading so well lately, it definitely makes me motivated because I see it can be done. I had a tough time yesterday and this post helps.

Lately I have been entering my full position on breakout and partial half my shares and then exit the other half. I have been reviewing my charts and see that I partial at weird times for a very small profit and then the second half can have quite a run. The problem is since I am partialling half my shares, the average profit is not very good.

Do you recommend taking partial with half your shares or a quarter, etc.? Or am I just bad at partials and need to work on my partial targets?

Thanks,
Tyler

PDT said...

Wait its a little early in the morning for me... I am a little confused

"So for ACI, even though the chart doesn't show a gap on 15 min., price opened lower that PDL."

Understood that this is technically a gap down stock so you would plot from PDH to ORL?

Good luck today

Jamie said...

Hey Tyler,

I partial with 50% of my shares. The purpose for a partial is to lock in some profits in case of a reversal. I usually look to partial at a pre-determined target or after 3 WRBs, whichever comes first. However, if the BO takes place on low volume and the market feels like it's about to roll over, it's time to take precautions. That's how I felt when I was in the POT trade, so I just locked some in at 1 pt.

If you are taking partials too soon, you have to ask why? It usually relates back to fear. For example, if the first trade of the day is a loser, psychologically, it screws with your head. The second trade is then seen as an opportunity to make up for the loss and you end up taking a small profit to cover your small loss.

Taking partials is my way of dealing with fear/greed. I did a post on fear and greed last week which got some good feedback.

Jamie said...

PDT,

More examples later tonight.

Susan said...

Thanks Jamie for this excellent post. Glad I asked you the question. There is always so much to learn from you.

In the Nasdaq future example of Jan. 14, it opened near the PDL and then moved downward. The fib. lines are drawn from PDH-PDL. How to draw fib. lines when price opens inside the previous day range, away from PDL and then breaks the PDL and closes weak - example: V, BUCY from Jan. 15 trade.

Hope you are having a great trading day today.

Thanks,
Susan

Susan said...

Jamie,

Check out Trader-X blog, post Crooks, blogs, and a stunning (disturbing?) photo, just in case you haven't checked out yet. :)

Jamie said...

Thanks Susan,

I left a comment on Trader-X blog. Must have missed that post earlier on.

I will work the V setup into tonight's post. Stay tuned.