3 Pivot Point, Base & Break - S&P Eminis

ES had several pivots into this level early last week. Each successful test strengthened this area as key support. Profit taking usually brings us back to key support. We tested support midday and broke out EOD. I've mapped out the remaining supports going into tomorrow. If all of these fail, last week's bounce will likely be another failed bear market bounce. The last remaining hope will be for a higher low.

CNQ was a head fake lower, which carved out a bullish morning star reversal pattern. I placed my Fibonacci retracement lines from the last leg down and I was looking for a 50%-62% retracement. Partial at 50% and exit balance at 62%. The downsloping 50 SMA acts as resistance.


On the wider timeframe of CNQ (TSX), we see 2 pivots at the former gap down level. Let's see if the third test will hold or set up a shorting opportunity tomorrow.

Base & Break Trades

Wednesday' Trades - Both LRCX and SOHU set up low risk entries on test of previous day high. SOHU was a late entry off of NR7


Friday's Trades were on the TSX (open for regular trading hours) - Two bank stocks set up Base & Break entries after 3 prior pivots into the base.

3 Pivots - Base & Break - Barrick Gold Corporation (USA) (Public, NYSE:ABX)

Gold is the only sector I track which had manged to hold above the Oct. lows after yesterday's market drubbing. Today it was strong out of the gate, probably as safe haven as more fear comes into the broad markets.

ABX gapped up on the open above the 5 DMA (orange) and into the 3 pivot base at resistance. I drilled down for a close look at the 1 minute timeframe as price developed a bullish pennant setting up a a low risk long entry. I milked this one all day with a second entry in the afternoon following a shallow pullback and a mini base.

I sort my watchlist on % change and focus on the outliers. Not too interested in shorting at this point except financials. ABX and AEM were number 1 and 2 respectively. AEM is not performing since the dilution announcement earlier this week and can be replaced with any number of other gold stocks. I like GG.

Place the Fibonacci extension from the previous day low to the ORH.

Intraday Support & Resistance - DryShips Inc. (Public, NASDAQ:DRYS)

DRYS gapped down and set up a low risk short at $42.50 (3PP base on 1 min.). My target was $40.00 as I didn't see much in the way of support on the daily. I was expecting 3 WRBs on 15 min. chart but it got off to a slow start. I decided to take a partial after 1 pt. because of lack of momentum. I let it go after it became obvious that DRYS was forming a base to reverse.

Price retested the BO point and traded sideways in a tight narrow range (price/volume contraction ahead of expansion). I took it long on the break above the base. Partial as price approaches the ORH and exit balance as price approaches the gap fill. Sweet!

The blue lines are intraday support/resistance or pivots. The uppermost line represents a gap fill. These lines help guide my trading.


SQNM - Yesterday's wide base at $26.00 held as support today. Don't try to catch a falling knife, wait for a suitable entry point. I entered long at $26.20 and exited as price approached $27.00.

ABX held support and I entered long for a retracement trade. If you look at the 1 min. chart, you'll see a H&S top just as price set up that morning swoon into support. Wish I had caught that move.

Capitulation Day Trades - Morgan Stanley (Public , NYSE:MS); Barrick Gold Corporation (USA) (Public, NYSE:ABX)

Morgan Stanley (MS) was the big news story today and it set up the perfect round trip trading. I knew it had capitulated but the long entry just flew past me. I guess I was drowning in euphoria over the short trades. Anyway, the 1 minute chart details the short entries. I'm now using the 10 period EMA (pink line) on the 1 minute time frame as opposed to the 5 ema. The 10 ema acts as support/resistance on the fast thrusts/swoons better than the 5 for this timeframe only. Still use 5 for longer timeframes.

My beloved ABX, setup a follow on trade after yesterday's strength. But just as the broader markets gained some real strength, ABX fell off a cliff. Sweet ride out of a bear flag. The last trade was a gut feeling, but I felt I could afford this stupid indulgence after such a profitable session.

Dummy Trades - American International Group, Inc. (Public, NYSE:AIG); DryShips Inc. (Public, NASDAQ:DRYS)

With all the headlines (LEH, MER BAC, AIG), I found today's markets were jittery and choppy so I stuck to the most orderly setups. AIG was a wide gap so I was looking for confirmation on the 1 minute time frame (3 pivot point base & break).

After a fast move to the downside and capitulation volume, it carved out a V bottom with handle for a low risk long.


DRYS was a low risk short on price/volume contraction at the base $50.70. Partial after 3WRBs and 38% Fib. extension of the previous day high to the ORL. A whip lash reversal resulted in a stop out with slippage on the balance of the trade. My Esignal platform was unstable most of the day, so I was caught in a dead screen, otherwise, I might have been able to anticipate and get a better exit on the second half.

Cup & Handle - Canadian Natural Resource Ltd (USA) (Public, NYSE:CNQ)

As the markets consolidate it's best to stick with the tried and true. Today's attempt at a rally was lame with few good trading opps unless you're buying support and selling resistance.

CNQ formed a perfect C&H pattern after carving out a triple bottom. The target 100% extension was met and slightly exceeded. I was hopeful for a gap fill, but it didn't happen.

GOOG fell out of a 3 pivot point base for a fast move to the next round $ number.

Wide Gap (3 Pivot Point Base & Break) - MBIA Inc. (Public, NYSE:MBI)

The first chart is the 15 min. time frame for MBI, a wide gapper with high pre-market volume which I traded today.

The second chart is the 1 minute time frame which highlights the key criteria to look for when scoping out the wide gap 3 pivot point base and break.

I developed this setup to trade wide, high volume gappers because they always seem to break long before the 5 period EMA catches up to price on the 15 minute time frame. Since proximity between price and the 5 ema is a criteria for a solid entry point on the 15 minute time frame, I was never sure of the correct timing and often let these setups pass me by. The last two charts show how far the 5 ema was lagging after the BO and just prior to the BO. In fact on this trade, price and the 5 ema never met until after the target (38% Fib. extension of the previous day low to the ORH) was achieved. A wide BO bar that closes strong helps pull the 5 ema closer to price.

The attributes I look for on the 1 minute chart are:

1. 3 pivots near the OR (high/low for shorts) define the base, ideally the pivots form near a whole or half dollar level;
2. price prints higher lows (lower highs for shorts) after each pivot;
3. tight price/volume contraction just before the BO.
4. 50 SMA breaks in close proximity to shorter MAs prior to or at BO.

The 15 minute opening range is key as in any gapper trade. A solid candlestick in the direction of the gap is the first observation to make. High volume is also an important success factor.



Related posts: AMLN PCLN VMW

Gapper Dummy Trade - Amylin Pharmaceuticals, Inc. (Public, NASDAQ:AMLN)

AMLN was a gapper short from a 3 pivot point base on the 1 minute time frame. Unfortunately, because of the distance from the down sloping 5 ema on the 15 min., it started to form a bullish base shortly after the first leg down, so I took a partial just in case. I closed the balance as price approached the 38% Fib. extension of the previous day high to the ORL as per Trader-X methodology.


AMGN set up a low risk short in the pivot area. I was targeting $22.00 but took a stop as price formed a bullish base on the 1 minute chart below. Since it didn't get close enough to the target, I wasn't expecting such a powerful retracement. In retrospect, the capitulation volume on the last leg down, foreshadowed the end of the move.


FLS was a continuation play off of yesterday's reversal. There's NR7 in play on 15 min. consolidation and a 3 PP base on lower time frame.

Gapper Dummy Trade - Analog Devices (Public, NYSE:ADI)

ADI was a gapper short that I spotted on my TI scan - consolidation BO (two days) with high relative volume. The 15 min. chart is above and the 1 min. below. The point I want to make on the 1 minute, is when price tested the morning swing low, it carved out a mini C&H and reversed sharply. I took a partial here. Technically, we should trail a stop above previous 15 min. bar and tighten the stop only if the next bar prints a lower low. So that means when price consolidates or reverses ( ie. next 15 min. bar doesn't print a new low), you're stuck with a prayer. That's why I took a partial after the small gain. Those C&H patterns are powerful. As you can see from the chart, it was a full hour before price printed a new low.

When price stalled at daily support I closed the trade. With less than an hour to go, I didn't want to risk 20 cents to make 25. But, the 38% Fib. extension of the previous day high to the ORL was met and exceeded for those who were patient.


LEH was a NR B&B. This stock has been pummelled and looks ripe for reversal after today's double bottom.

It was do or die for RIMM today. After testing $125 support at the base of the daily trend line, it needed to make a move. The gap up was a good first clue and then it was just a matter of waiting for a tradable base.

CNQ is posted here for my memory. I shorted the build in crude inventories after it bounced from the initial reaction low, and later went long on a 3 PP B&B (NRIB on 15 min.). I read on Briefing.com that Warren Buffett and Bill Gates were spotted in Alberta checking out CNQ's Horizon Oil Sands development.

Q&A

T writes -

I’ve been following your blog for quite some time and I must say it’s great … next to TraderX’s blog (which doesn’t run anymore unfortunately) it’s the best out there. Keep up the great work.

Q. Nevertheless, I have some questions that I wanted to ask you regarding your trading style. How do you judge what stocks you play during the day. Do you have a general watchlist of momentum stocks, do you screen for stocks every morning before the market opens (like TraderX with the gappers), what is it?

A. I prefer to trade NASDAQ stocks because computerized trading is more orderly and level II allows for greater visibility of market depth. I usually have a short focus list of stocks to watch from my own watch list and from HighChartPatterns newsletter of B&B setups. I screen for gappers every morning using several sources but primarily Trade-Ideas scanner, IB scans, and Briefing.com.

Q. What time frame do you mainly trade? What is your favorite setup? And how do you judge when to take your partial and when to get out with the rest? Last question ;-) … how do you judge where you put your stop loss and do you trail it?

A. I use four time frames daily, 15 min. 5 (3) and 1 min. - and hopefully everything gels. I prefer the 15 min. time frame which generally allows for more room to run. If I see a nice setup on the 15 min. I still want to make sure it fits with the higher and lower time frames. I manage the entry on the lowest time frame because that is the most critical part of the trade. My favorite setup is base & break which comes in many forms including a gapper momentum play that sets up with NRIB (NR7) or C&H or 3 PP B&B. For chart patterns I usually have a measured move target of 100%, but take a partial after 3 consecutive wide bars in my direction. Otherwise, I look for support/resistance levels to partial out. For gappers, I will exit in full the standard 38% Fib. extension (Trader-X style) if I get into a stock that has a wide spread or stalls midway to the initial target (AMED from Friday is a good example). If the gapper moves quickly out of the base with good volume and a tight bid and ask, I will partial out in the usual manner. Normally, I place my initial stop at previous bar high/low on 15 minute chart, but if price stalls on the BO and prints a reversal candle right out of the gate, I tighten the leash. See example of PG from Friday.

Thanks a lot for sharing your expertise!

Round Trip - Amgen, Inc. (Public, NASDAQ:AMGN)

The first chart is daily chart of AMGN, which shows why it is having such a hard time breaking out of the $64-65.00 range. There are lots of pivots dating back to 2006 which are getting in the way of a smooth BO. Last week it failed at $64.00, but has continued basing in a tight range so I have kept it on my focus list. Today, it finally broke $64.00 and was setting up a nice C&H pattern at $65.00. It was no surprise that the C&H pattern failed.

As you can see from the 5 minute chart below. I caught the break of the opening range for a fast vertical move. I held a partial for a sharp retracement and series of higher lows. I tightened the stop as the waves became shallower. Then just like, déjà vu, it failed at $65.00 and I was stopped out. The next trade was short the failure and that brought us all the way back home - round trip.

AEM has rallied 10 pts. from its bottom in just a few days. Today it set up a 3 pivot base & break short after forming a big top. I was expecting a bigger move, but I'll take what I can.

A false BO and small loss, was the trigger for a nice retracement on FWLT.



Also, caught a quick move in RIMM - break of 15 min. ORH. The so called H&S top didn't pan out obviously.

Gapper B&B - priceline.com Incorporated (Public, NASDAQ:PCLN)

This is a zoomed in view of the early action (1 minute time frame) on PCLN, an earnings gap (thanks to José for the zooming tip). I was hoping this would trade sideways a little longer because the 50 SMA was still very far away as price printed the third pivot into the base. The next two bars were narrow, the second of which was NR7, so I knew it was going to BO. I took the trade knowing the premature BO would likely not reach my target of $95.00 from the daily support.

Characteristics of this type of setup:

1. 3 pivot point base;
2. Lower highs off each pivot;
3. Tight price/volume contraction just before the BO. Sometimes this last part occurs just above the base ie. mini base within the bigger B&B setup.
4. If all of the MAs are in close alignment just above price, the setup is A+. PCLN did not meet this last requirement but still good for a fast trade.
   

I took half off as soon as price took out the previous bar high, so trail a stop two pennies above the previous completed bar. After that PCLN, formed a solid 2 PP base and I tightened my stop on the balance.

Keep PCLN on the WL for future weakness if it fails at $95.00. Today was a high volume gap and I don't think even Captain Kirk can save it now.

PACR is a good example of a bear flag right out of the gate. I missed the initial trade, but did manage another fast trade when it carved out 3 NRIBs with all of the MAs in perfect formation for a breakdown.

FWLT, another gapper, set up a 3PP base later in the session. I waited for price to consolidate the initial thrust. Turned into a big winner with a scalp trade into the close to sweeten the pot.

Cup & Handle - China Medical Technologies, Inc. (ADR) (Public, NASDAQ:CMED)

CMED was an earnings gap which formed a C&H with NRIB (NR7) - price/volume contraction before expansion as discussed in yesterday's post. The Cup & Handle pattern is easier to see on the 5 min. time frame. Price rallied nicely out of the base despite the lame volume. That was a good clue that something was not quite right, but I got caught off guard anyway. After tagging $48.50, price retraced sharply and I couldn't take my partial. I moved my stop just under R1 and took a partial when price finally moved back towards $48.50. After all that narrow sideways trade, I was expecting 3 WRBs when price closed above $48.50 resistance, but CMED retraced again. Finally, after the FED, on the third wave, volume finally kicked in.

ACI was a B&B short off of a narrow 3 PP base. It got off to a very slow start. The only thing that kept me in the trade was the series of lower lows and lower highs on the lower time frame. I took a partial just ahead of the FED. My target was $45.00 which is a solid support level on the daily time frame above. We didn't quite get close enough to the target for me to plan an exit. At first I thought, bear flag, but then it formed a 3 PP base at $46.00, so I covered and went long into the close.

After three waves down, I expect ACI will find support at this level, and retrace. $60.00 looks like a good pivot target, but even a 32% retracement from the June highs would be good.


Shorting ABX was my FED trade. My logic was that rate cuts are bearish for the USD, so no rate cut is good for USD, therefore bad for Gold.