Trading Gaps Types and Characteristics of Gaps

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1 Trading Gaps Types and Characteristics of Gaps Knowing where the gap is located in the chart can quickly help identify what type of gap it is... Gaps are a common occurrence in the markets. Everyday there is always at least one stock that has gapped up or down when the market opens. Why? As long there is some event happening somewhere between the market close of the previous day to the opening of today, there will be gaps. Even if the markets eventually move little by little toward the inevitable 24-hour format, there will always be gaps. After all, somewhere around the world, there is some event happening during the weekends as well. Plus, there is always an excited group of investors who making a big deal out of something or even for no reason unknown to the rest of us. So, gaps are a fact of life and there is no avoiding it. The best thing is to take it in stride and learn how to profit from it. There are three different types of gaps: Breakaway, Runaway and Exhaustion gaps. Each of these gaps appear at a different cycles of the markets. Breakaway gaps occur when a stock has been in a consolidation stage; instead of a normal market-session move, it breaks out with an opening gap. Normally, these gap in the same direction before to the consolidation stage. There is one caveat: when the breakout happens, it can be in either direction. This gap is trickier than the others because the intent of direction is unclear.

2 In the chart example above, the market was going through a correction. When it finally finished consolidating (a symmetrical triangle pattern), it broke out with a gap to the upside to end the correction period. As for Runaway gaps appear when the stock has been trending for some time. Instead of a normal move up during market hours, they open with a gap in continuation of the dominant trend. It shows there is more interest in the stock, possibly by some positive news to further boost the investors eagerness to own it. Runaway gaps are also called Measuring gaps because they are often used as a centering point of measurement from the beginning of the trend to the gap, then from the other side of the gap to measure the next likely level where it would reach. The chart below shows the prevailing trend, moving steadily upward. Along comes the opening gap, pushing in the same direction higher, not even a moment s pause or pullback until much later in the trend.

3 P.S. - Do you want to day trade Stocks, Futures & Forex with up to 90% accuracy? Try the Millennium Traders a consistently profitable trader service through all market conditions, one of the most profitable trading service on the net...» Get More Info Now! Below is the example of how a Runaway gap is also used as a Measuring tool. When the gap has been identified, the measurement is taken from the beginning of the trend (61.98) up to the bottom of the gap (87.08). From that distance, it is used to measure how far the prices will likely to continue. So the measured target starts at the upper part of the gap (102.64) to the expected level above it. In this example, the target was This is a very powerful and easy-to-apply concept which can be used to find profitable trades.

4 The last type of gaps is the Exhaustion gaps. These occur when the market has been trending for a long period of time, normally after a bull market or bear market that as been lasting for a few years. When it appears, there is a period of slowing of the trend slowing, or period of consolidation. They usually appear near tops or consolidation areas after strong trends. Many times, the Exhaustion and Breakaway gaps are mistaken for one another. Depending on the location and whether or not it was an up gap or a down gap. The Exhaustion gap is an up gap appearing in the market tops, and a down gap in market bottoms. As for the Breakaway gaps, they are up gaps in market bottoms (and from consolidations) and down gaps on market tops (and from consolidations). Below is example of each to better identify the difference. The market has been forming what look like a top, with the symmetrical triangle consolidation. Triangles are usually trend continuation patterns, but as the chart shows, the gap was break away from the pattern to the downside. This is a breakaway gap. After that gap, YHOO attempted to push prices up again with an up gap. The prices gapped up to a new high, then turned around immediately the same day. Then the next following days, the prices filled the gap, confirming that the previous gap and the direction of the market (now downtrend) are real. The Exhaustion gap was at last identified as such when considering the surrounding price action. The action created an island reversal.

5 The example below is the exhaustion gap (down) at market bottom. The market has been trending down with determination. Finally, a blow-off came with a big gap down, but there were no more selling. The next few days show the market stabilizing, even some buying. Finally, more buying pushed the market higher, ending the market bottom.

6 Knowing where the gap is located in the chart can quickly help identify what type of gap it is. These gaps give clues to the strength or weakness of the stock since they are usually turning points in the market direction. Paying extra attention to them can provide unique opportunities to trade with the right trend (or reversals) and profit from them. The next article will discuss the tactics in entering and exiting in trading these gaps. Trading Stocks Education - Trading tactics & examples Trading Gaps - Part 2 While there are many strategies involving gaps, let's look at a few here. As a rule we like to buy strength and sell or sell short weakness. This is the preferred play. There is an exception however. Below is an example of shorting a strong stock.

7 chart courtesy of Mastertrader.com The nicest plays are where a stock gets extended and then gaps in resistance (for a short). However, there are times a stock may not have a resistance area, like when at new recent highs. Why short a strong stock? Well, normally we would not. But this stock is over extended. Look at the 20-period moving average (red). Notice how far away we are now as compared to in the past two months. Notice that there were six days up in a row, all of them since the breakout from the base, or consolidation area on the daily chart. Look at the increasing volume as shown by the last three green bars on the daily chart. Now, on the last day shown, the stock gaps up. That is the key. This is known as a Novice Gap. The latecomers are deciding that now is the time to buy. This is where the opportunity is, on a day like this on the gap up. This is a guerrilla type tactic that should be used for the day, or possibly one overnight. Super Divergence Blueprint - Learn how to discover 'hidden' market moves. There are points in any market (stocks, forex, futures) where a "divergence pattern" occurs that could trigger a potentially huge market move that most trend-following methods would otherwise miss? Super Divergence Blueprint by ProfitsRun reveals how you can discover Hidden Trades with astonishing simplicity.» Click To Get More Info! Below is another example on a long play.

8 chart courtesy of Mastertrader.com Here again, look at the distance from the 20-period moving average. There are five days down in a row. One thing missing here is the big increase in volume on the last day. However, look at the size of the gap. This is a large gap after five days down. Here is a slightly different play shown below in KANAD. chart courtesy of Mastertrader.com Notice all the same things here. The distance from the 20-period moving average, the number of days up, and the increasing volume are all present. Here, the stock does not gap up in a novice fashion, but rather it gaps down (60 cents). This is known as a Professional Gap. Profit taking sets in and the stock drops. This stock opened on its high of the day. We shorted this stock at with a stop at the high of the day, 15 cents away. We took half profits at our first target and are trail stopping what will hopefully be a swing trade.

9 There are two nice things about playing gaps that many traders like. You can usually have very tight stops, (or can pass on the ones where you do not), and you usually get some results fairly quickly. Often reversal time (10:00 A.M.) brings some results. Trading Gaps - Part 3 Trading Stocks Education - Trading tactics & examples Gap Reversals These methods work best for a two or more day trade, known as a position trade. This method seems to work best on NASDAQ stocks. In trending markets, it has an excellent accuracy rate of more than 80%. Bullish Gap Reversal Guidelines or Requirements A stock that has a consistent trading range of at lease 1.75 points. Stocks that have a decent spread. Although a stock is often entered with an ECN, a trader does not want to be severely hurt by the spread. Stocks should also have an adequate number of market makers to allow for cushion. The stock should be down at least two days in a row before it becomes a consideration. Open of the current day MUST be in the top 25% of the day's price range. Close of the current day MUST be in the bottom 25% of the day's price range. With VisualTrader, you will know when the market is turning, which industry groups are leading the stampede, and which charts have the best setups. OmniTrader gives you the power to make decisions fast! It gives you real trading signals with all of the supporting information automatically displayed for you. Next trading day's ACTION If the stock gaps open to the downside and then begins to rally back, buy it at 1/8 to 1/4 above the previous day's low. If a trader misses that entry, buy when it trades above its first one-half hour high. Market makers should be buying the stock as well. Stop/loss should be 1/8 to 1/4 below the current day's low. Look closely at the chart to determine an average and reasonable profit amount, or decide on a dollar amount that is reasonable for the stock and get out at that point. If the market and/or sector remain strong, a trader is in very positive territory and should hold it for the next day or two.

10 Bearish Gap Reversal Guideline Requirements A stock that has a consistent trading range of at lease 1.75 points. Stocks that have a decent spread. Although a stock is often entered with an ECN, a trader does not want to be severely hurt by the spread. Stocks should also have an adequate number of market makers to allow for cushion. The stock should be up at least two days in a row before it becomes a consideration. Open of the current day MUST be in the low 25% of the day's price range. Close of the current day MUST be in the top 25% of the day's price range. Next trading day's ACTION If the stock gaps open to the upside and then begins to fall back, sell it short at 1/8 to 1/4 below the previous day's high. If a trader misses that entry, sell it short when it trades below its first one-half hour low. Market makers should be selling the stock as well. Stop/loss should be 1/8 to 1/4 above the current day's high. Look closely at the chart to determine an average and reasonable profit amount, or decide on a dollar amount that is reasonable for the stock and get out at that point. If the market and/or sector remain weak, a trader is in very positive territory and should hold it for the next day or two.

11 Types and Characteristics of Gaps Trading Gaps - Part 4 Trading Stocks Education - Trading tactics & examples Morning Star Gap Reversal Guideline Requirements A stock that has a consistent trading range of at lease 1.75 points. Stocks that have a decent spread. Although a stock is often entered with an ECN, a trader does not want to be severely hurt by the spread. Stocks should also have an adequate number of market makers to allow for cushion. The stock should be down at least two days in a row before it becomes a consideration. Open of the current day MUST be in the top 25% of the day's price range. Close of the current day MUST be in the bottom 25% of the day's price range. Above average volume on the current day is preferable.

12 Next trading day's ACTION If the stock gaps up on the open (at least 1/2 point to one point) above yesterday s closing price, buy it immediately. If a trader misses that entry, buy when it trades above its first one-half hour high. Market makers should be buying the stock as well. Stop/loss should be 1/8 to 1/4 below yesterday s low. Look closely at the chart to determine an average and reasonable profit amount, or decide on a dollar amount that is reasonable for the stock and get out at that point. If the market and or sector remain strong and a trader is in very positive territory, the trader should hold it for the next day or two. Super Divergence Blueprint - Learn how to discover 'hidden' market moves. There are points in any market (stocks, forex, futures) where a "divergence pattern" occurs that could trigger a potentially huge market move that most trend-following methods would otherwise miss? Super Divergence Blueprint by ProfitsRun reveals how you can discover Hidden Trades with astonishing simplicity.» Click To Get More Info! Evening Star Gap Reversal Guideline Requirements 1. A stock that has a consistent trading range of at lease 1.75 points.

13 Stocks that have a decent spread. Although a stock is often entered with an ECN, a trader does not want to be severely hurt by the spread. Stocks should also have an adequate number of market makers to allow for cushion. The stock should be up at least two days in a row before it becomes a consideration. Open of the current day MUST be in the low 25% of the day's price range. Close of the current day MUST be in the top 25% of the day's price range. Above average volume on the current day. Next trading day's ACTION If the stock gaps down at the open (at least 1/2 point to one point) below yesterday s closing price, sell it short immediately. If a trader misses that entry, sell it short when it trades below its first onehalf hour low. Market makers should be selling the stock as well. Stop/loss should be 1/8 to 1/4 above yesterday s high. Look closely at the chart to determine an average and reasonable profit amount, or decide on a dollar amount that is reasonable for the stock and get out at that point. If the market and/or sector remain weak, a trader is in very positive territory and should hold it for the next day or two. Windows (Gaps) Windows as they are called in Japanese Candlestick Charting, or Gaps, as they are called in the west, are an important concept in technical analysis. Whenever, there is a gap (current open is not the same as prior closing price), that means that no price and no volume transacted hands between the gap.

14 A Gap Up occurs when the open of Day 2 is greater than the close of Day 1. Contrastly, a Gap Down occurs when the open of Day 2 is less than the close of Day 1. There is much psychology behind gaps. Gaps can act as: Resistance: Once price gaps downward, the gap can act as long-term or even permanent resistance. Support: When prices gap upwards, the gap can act as support to prices in the future, either long-term or permanently. Windows Example - Gaps as Support & Resistance The chart below of ebay (EBAY) stock shows the gap up acting as support for prices.

15 Often after a gap, prices will do what is referred to as "fill the gap". This occurs quite often. Think of a gap as a hole in the price chart that needs to be filled back in. Another common occurance with gaps is that once gaps are filled, the gap tends to reverse direction and continue its way in the direction of the gap (for example, in the chart above of ebay, back upwards). The example of ebay (EBAY) above shows the gap acting as support. Traders and investors see anything below the gap as an area of no return, after all, there was probably some positive news that sparked the gap up and is still in play for the company. The chart below of Wal-Mart (WMT) stock shows many instances of gaps up and gaps down. Notice how gaps down act as areas of resistance and gaps up as areas of support:

16 Gaps are important areas on a chart that can help a technical analysis trader better find areas of support or resistance. For more information on how support and resistance work and how they can be used for trading, (see: Support & Resistance). Also, Gaps are an important part of most Candlestick Charting patterns; (see: Candlestick Basics) for a list of candlestick pattern charts and descriptions. That is a lot of data to take in but I will try to highlight some of the more relevant items. The first interesting fact is that the % up/down over the past 10 years has been relatively stable with the 10yr. avg being 54% up versus 46% down. Even the huge rally since early 2009 did not cause the gap data to change very much. What has changed over the past few years is the size of the Gaps look at the data versus the data larger gaps are much more frequent lately. This is why in part I thought that this blog would be somewhat timely and relevant. The last chart analyzes the Gaps to see if they fill prior to the market close. You can look at the historic data yourselves, but what I wanted to point out in this blog is the 2010 data. For down Gaps less than $0.50 in the SPY look at that data 94% fill rate. That is about as close as you can get to a guarantee. Helicopter Ben and the Federal Reserve Board have made smallish down Gaps almost free money. The last thing I will point out for 2010 is the Up Gap data for Gaps $0.75 and larger look at how the fill rate dropped in Talk about Gap and Go!! We should all thank Uncle Ben! Stock Examples: For the remainder of this blog I thought I would show some examples of how I look at stocks that make large pre-market gaps. Each of the three illustrate different aspects so I thought they should all be included.

17 Common to all of these examples is how I prepare for the market open. I like to have my 5min chart set to show the pre-market trading from 8am so I can draw horizontal lines at the high/low pre-market prices. This is the range that I watch to see how the market trades after the normal hours open. Will the stock break the pre-market range highs?? If not then you can expect some down side testing. SPY Historically any gap higher than about $0.70 indicates a real possibility for a GAP and Go start to the day. Today we saw a $0.96 Gap. Here is the SPY 5-min chart: After drawing the pre-market range into the chart we let the market open up to see what will happen. The pre-market range is pretty tight $ $ this tight of a range with the size of gap ($0.96) makes me lean to go long on the break higher of the pre-market range or the high of the first 5-min candle. This happened on the 3rd candle. The key is to buy a core position for Trend Days and then trade around that position. Sell your trading position on extremes and buy on pullbacks. For extremes I like to watch my RSI(2) 5-min chart and I look to sell when that reading is > 90%. On pullbacks, I look for the 1min-stochastic to get oversold (i.e., < or around 25). I circled in green two of the more obvious pullbacks. On Trend Days it is also very normal to buy any pullbacks into the 20ema this never really happened until the purple circled area. The thing to note was that before this pull-back, the SPY failed to make a new high on its 12:15pm eastern push. That is almost to be expected since trends often pause during the normal lunch hour break (12-1:30pmish). What this lower high should do however is warn you to not automatically buy the retracement into the 20ema be a bit suspect. That would have indeed saved you some money here in the SPY as it chopped lower over the lunch hour and then finally broke the line in the sand that most professional intraday traders

18 utilize the 50ema on the 5min chart. The SPY made a bear flag kind of rally into the closing time period so I am expecting some weakness at least first thing tomorrow. This blog is getting too long so I will be brief on the last two examples: FCX: The FCX chart is slightly different than the SPY early on (click on the chart to enlarge). You can see that FCX had trouble at its pre-market high levels once the market opened. The first push through that line came at 9:55am. The fact that it took 25min was your first warning that it was not likely to go shooting straight up. In fact the first candle to break this level actually closed back below the marker line. The smartest thing to do is to see how FCX does when it tests the lower end of its > 9:30pm price range. Price pulled into the 20ema (red circle) and the RSI(2) signaled to try and go long here and that is what I did. The 5min chart got over bought at the upper bollinger and was confirmed by the RSI(2) (green circle). This is where I sold. LVS: The last example is LVS LVS had the biggest pre-market bounce of the three examples. It gapped open 2.85% versus.76% for the SPY and 1.3% for FCX. This should be a warning signal for you (click on chart to enlarge).

19 You can see in the chart that the market opened up and LVS quickly shot above the premarket range, but the absolute level of the move should have caused some caution. The first couple of candles showed upper legs which again should have raised your antenna. Aggressive traders could have started trying to short LVS here with the HOD as their out. I hate shorting stocks at the start of a potential Trend Day in my opinion there is no quicker way to lose money. As I mentioned though, LVS was really stretched so I can see the rationale here in this case. More typical areas to short would have been the high or low premarket range boundaries with the stop just above the HOD. As many of my readers know, when shorting a stock I try to find an optimal time/price spot to short. I was not involved in LVS today but to me that spot would be after the first real bounce that LVS had which actually put in a lower high that was at around 11:30am eastern (red circle). This area was also right near the pivot point at $47.26 and the open price of $ The break of the 50ema confirmed the bearish nature of the LVS chart today. I m sorry I missed LVS today as this chart was pretty text book. Conclusion: I hope people learned a little bit about the stats behind SPY gaps. Also, I think all three of my examples showed different strategies for trying to trade, a straight gap and go (SPY), a retracement into the 20ema (FCX), and a failed break higher (LVS). Utilizing Support and Resistance Levels - Part 1 Applying basic price levels to identify support and resistance levels. December 6, 2007 OK gang... let's let going... First of all... thanks for coming! This is the first of a 4-part lecture series on support and resistance. For those of you who have purchased my CD series, the material in this series is going to be a bit of refresher. It will cover some of the main points in the S/R segment of that course, but I have completely

20 new charts, etc., so it will help possibly clarify some of the points as well. I will take questions following the class, so please hold off until then since often I find that many of the questions people have mid-way end up answered by the time I am done anyway. :) Simply put, support and resistance levels are places in the market when the current trend or price move that is in play in the market will either turn or stall. The traits of support and resistance levels apply to all type of markets and time frames, so the concepts in this class will figure into any market you trade. Now, when thinking of support and resistance levels, it is very common for most people to think of them in terms of absolute price levels. For instance, if they are looking at $50 as a resistance levels, they mean exactly $50. On the other hand, if they are looking at moving averages as a support level, they will check to see what the exact price of the moving average is, such as $ In reality, support and resistance levels are not exact prices, but rather price zones. So, if the resistance level is $50, then it is actually the zone around that $50 level that is the resistance. The stock may hit only $49.87 or it may hit $50.25 and still hold the $50 as price resistance. The main factor in determining exactly how much the exact prices are tested by is how quickly or slowly the prices move into that resistance zone. For instance, if the zone hits very quickly on a large momentum surge, then it is more likely to hit that $50.25 level. This is also the case if the stock is a rather volatile one with a wide price range intraday. If the security spikes higher and does not quite hit the price resistance, such as a spike into $49.70, then it may round off into $50 with slightly higher highs and never exactly touch the $50 price resistance zone before turning over due to the slowdown in momentum into that resistance. The larger the time frame, the greater the price zone is as well. A resistance zone at $50 on a weekly time frame may have a range of $1 on each side of $50. Where traders tend to run into trouble is in thinking that because the stock has traded over $50 by more than just 10 cents that the $50 has broken, so we often hear of people "buying the highs" or "shorting the lows" in the case of support. For today's session I am going to focus on 4 main types of price support and resistance. They are WHOLE NUMBER SUPPORT AND RESISTANCE, PRICE PIVOTS, PRICE CONGESTION ZONES, and EQUAL OR MEASURED MOVES. I will begin with the whole number support/resistance (s/r). Whole number support and resistance refers to the price levels most of us have in our head when we think of support and resistance right away. They are levels like the 14,000 that we have heard so much talk of in recent months. CNBC does not get excited by the Dow hitting 13,984. We do not hear about oil in terms of the cents per barrel, but rather it's proximity to breaking the whole number level. When a security, or the market overall moves into these larger price levels, rounded to either the dollar in most stocks, or the 10s, 100, etc. people tend to react most often at those levels. It's second nature. My third grader has just spent her first semester in school learning how to average and to round up or down. That is then taken with us throughout our lives.

21 FIGURE 1 - $DJI Daily For futures traders a common level we will notice in the NQ is how that tends to gravitate to moves of 5 points at a time and stall at or about the 5 point increments. In the YM the 10 point increments, and particularly the 100 point levels catch people's attention and reversals or consolidations tend to form at those zones. In the chart of the Dow Jones Ind. Average (Figure 1) we can see how it often moves towards those 100 point increments as well. The 12,000 and 14,000 level are the most pronounced in this case, but many of the places it stalls at are almost exactly at a 100 point price level. Even though at "D" the Dow technically broke 14,000 in terms of the exact price (yet held the 14,200 securely) when we think of the Dow in terms of a larger time frame move, we have yet to see the 14,000 zone penetrated. At 14,200, the Dow was STILL AT the 14,000 price resistance zone. What I am looking for at this point is a third test of that zone, maybe even a slightly higher high and then a larger correction where we can see a stronger reaction to this price resistance zone on a larger time frame. FIGURE 2 - JBLU Daily

22 Here is another example of price support and resistance (Figure 2). This time it is in a rather cheaply-priced stock that I'm sure you've all heard of... JBLU (JetBlue Airways). At times, the support or resistance zones will appear to break, pushing through the s/r level only to swing back and hug that level. This was the case in March and early April in JBLU. JBLU had fallen into $12 on rapid momentum, pushing it somewhat under the exact price support of $12. It then hugged that level for over a month before giving way to another round of selling into the $10 support zone. Once again the momentum was strong, so it traded slightly under that exact price before pulling highs. When it tested it the second time around, however, in the middle of June, it held that price more precisely since the momentum at that point was not as steep. This second test of $10 was then followed by a retracement back into the $12 level. Once a support zone breaks, such as the $12 level in JBLU, that zone then becomes resistance on a reversal. FIGURE 3 - PDLI Daily

23 Here is another example that you can look at which shows similar types of price activity (Figure 3). Notice that the rapid move into November with one bar of selling pushed through the $18 exact price level that first day it it, however, it then sprung back and coiled along that price support zone. Many times this would present itself with a drop into something such as $17.82 and then the next test of the $18 support within the coil would hit $17.96, followed by a third move which tests the $18 exactly and holds, often forming a smaller congestion base at that exact price before breaking on that third test. Today PDLI reversed back into that price level and hence it served as resistance. The highs of the day were $18.12 with a closing price of $ Both were well within the $18 price resistance "zone." The second type of price support/resistance that I wish to cover is closely tied to the first. It deals with retests of previous pivot highs or lows. A "pivot" is simply a level where prices reverse. You can usually identify them by the "V" or upside down "V" that they form. You may not see them unless you drop down to smaller time frames if the security is in a congestion. Sometimes these price pivots correspond to whole number s/r, sometimes they do not. FIGURE 4 - $DJI Daily

24 In this example of the Dow, it does correspond to the whole number support/resistance levels (Figure 4). We are looking first at the 14,000 level. This hit in July for the first time and then retraced back into the prices from the first quarter. When the Dow hit the 14,000 zone for the second time, it was actually at the end of September that this took place, coming off a sharp rally mid-month. The "zone" of the 14,000 high was where all the price bars overlapped at the initial 14,000 highs. The stronger upside momentum on the second test of the 14,000 resistance level allowed the Dow to push somewhat past the exact high to form a slightly higher high before the momentum reversed and led the index back into the previous lows. The August lows were made on extreme downside momentum. Since the pace was slower into November on that second retracement off the 14,000 highs, it did not quite hit the exact lows from August, but only came into the support "zone" of those lows. FIGURE 5 - JBLU Daily

25 Another example was the $10 level I had mentioned earlier in JBLU (Figure 5). You can see that while $10 hit and held on the first day into that level in April. It then rolled over a bit off the lows, like the Dow did off the second highs, and made somewhat lower lows. It did not quite hit that $10 support the second time around, although it did retest the "zone" of that support in June. Whole number support/resistance can also be tied into the third type of price support/resistance: congestion zones. When a security falls into a trading range, congestion zone, base, coil, or whatever you wish to call it, that zone becomes s/r on any retracement once it has broken. A breakout to the upside from a trading range will mean that the range itself becomes support on any retest of it. These trading ranges often take place around whole numbers. FIGURE 6 - $DJI Daily

26 As in the other types of s/r, the stronger the congestion is retested, the more the security can penetrate that s/r zone. A more shallow move into the congestion after it breaks lower and is moving higher, such as in "A" in Figure 6, can mean that the lower end of the range tests and holds first like it did a few weeks before "A". A stronger move, such as into "1" on a pullback off highs on an upside breakout, can lead it to testing the lower end of the channel before it sees much reaction. In #2 it also pulls into the lower half of the earlier congestion, which also corresponds to the 13,400 whole number support and the pivot high in "B". In this case, #2 has all three types of price support we have covered thus far interacting at the same time, making it a very substantial support level! FIGURE 7 - JBLU Daily

27 Another example of this type of s/r also took place on the chart of JBLU (Figure 7). Not only was the July test of $12 a return to the whole number as price resistance, but it was also resistance from that earlier congestion level. FIGURE 8 - PDLI Daily PDLI has two examples (Figure 8). The first is a larger congestion back in September and the second is just a three day congestion in mid-october. Since the price drop into the larger congestion was very rapid, it pulled to the lower end of it in the second

28 half of Oct., while the smaller congestion served as resistance on the bounce off the Oct. lows. The final type of price support or resistance that I will show you today is an equal or measured move. You can call them whichever you wish :) This concept is rooted in momentum as well. Essentially, if a price move is followed by a congestion, such as a base, flag, etc., then as long as the congestion breaks at about the same momentum as the move into it, it will have the strong potential to hit an equal move level on that continuation. FIGURE 9 - JBLU Daily JBLU has two such examples on this daily chart (Figure 9). Obviously you can combine this with the other types of s/r to help establish targets, even if something is at new all-time highs! FIGURE 10 - PDLI Daily

29 PDLI (Figure 10) also had this take place when the correction off the Oct. lows gave way and the new congestion zone into November broke lower at the same rate of selling as it had seen heading into that congestion level. It was unable to mimic the move for a third time, however, due to a much more substantial support level from the lows in This was the first time that larger support zone had been retested, so it was unable to easily break through it. Smaller time frame support or resistance levels will always be easier to bust than those on a larger time frame, even though the zones on the larger time frames will be wider. At the same time, support or resistance levels which have most of these types of support or resistance hitting at about the same time will also be stronger than if only one of these 4 hits at any given time. Since the prices of each will not tend to line up exactly, this is another reason you must consider them to be ZONES and NOT EXACT PRICES!!!! Utilizing Support and Resistance Levels - Part 2 Applying trend lines and channel analysis to identify support and resistance levels. December 20, 2007 For those of you who could not make it to the last class, the link for the logs is as follows: Today's topic is an expansion upon the previous segment where I introduced you to the basics of support and resistance levels. In the last class I talked about the various types of price support and resistance. These included whole numbers, previous highs and lows, congestion zones, and equal move or measured move levels. Gap zones also fall into this category. Today's topic deals with a more difficult type of support/resistance level to identify: trend

30 lines and trend channels, as well as how to use them in your trading. I will begin with a very brief review of what exactly support/resistance levels are and how to approach them. Support refers to prices under current levels, while resistance refers to prices above. Essentially, they are price areas where a security is likely to have some sort of reaction to that price area. The key word here is "area," or "zone" is another word that could be used. Support/resistance levels are NOT exact prices, even if you may think they should be! Even $100 is not an exact resistance price if a security is moving higher into it. Rather, it is the zone around that price, which can be wide if the volatility is high and momentum is strong heading into it, or can be rather narrow if volume is low and the momentum or pace of a move into the resistance is gradual. From last week you may recall that we looked at a specific type of price support/resistance whereby we looked at previous highs and lows as support/resistance levels. Today's class builds upon that concept. A quick review of it is shown with this example in Figure 1 of the ES from the last couple of trading days. The ES has been in what is called a "trading range" or "congestion zone" during the past 4 sessions. This means that most of the prices fell within a given price range. On the 17th, the day began with a narrow range. #4 and #5 marked the lower end of that range. #4 was support, which held when tested a second time. FIGURE 1 - ES 15 MINUTE The third test of a support or resistance level is often the one most likely to break. The ES did so early on in the afternoon. Once support breaks, when it's tested again, such as at D and then E, it becomes resistance. This concept is repeated on a larger scale with A, B, and C as highs and 1, 2, and 3 as lows. If you were watching the market into the close, you will notice that the ES tested that upper channel resistance again afterhours, making this the third test after the move higher from mid-day on the 18th. (Update: It then broke higher later in afterhours trading and opening with a significant upside gap into the next session.)

31 The idea of trend lines and trend channels takes the basic idea of previous highs and lows as support/resistance levels and turns it on edge. So, instead of the sideways trading range with obvious highs and lows, we now are beginning to look at other types of trends using the same principals. The sideways trend is just one of the three major trends in a market. A trend is simply the direction of price movement. An uptrend is a series of higher highs, while a downtrend is a series of lower lows. The sideways trend is more of a choppy range with highs and lows at comparable levels, although often they will favor one end of that range over the other, much as they did o the morning of the 17th in the ES in the first example, where they favored the lows. FIGURE 2 - UPTREND CHANNEL Figure 2 displays a typical uptrend. The blue lines connecting the high points and the low points are the trend lines. Combined, they make up the trend channel. Now, to form a trend line, you simply need two points of reference to go off of. In the sideways trend we only needed one: the previous high or low. In a directional trend, such as an uptrend, we need two highs with the second higher than the first. In this image those points are A and B. Before any lows following B are even made, we can go ahead and connect those two upper price levels and extend the line connecting them outwards. This becomes the trend line resistance levels. As it is tested on a subsequent move higher, the zone around that line serves as a level where prices are likely to react in some manner to that resistance zone.

32 Keep in mind what we talked about last time: The faster a resistance level hits, the more "give" it has to it. So, if the momentum off the low from #2 is faster than off the low from #1, then it can push through that upper trend line's exact price level a bit more before bouncing back in. When the prices in this chart returned to the lower channel at #3, they did not make it back to the upper level again. Instead they only moved up about halfway or a bit more before dropping through the lower trend channel. Now, at this point, that lower trend channel support has broken and becomes resistance on any move or push higher. This is the case of where it is tested in D. If you miss out on the first or even second entry trigger when playing reversal patterns, then "D" becomes a good level to pick up a short position. Often I do not even wait for a smaller trend channel to form and break, but will enter the short as soon as I see any stalling within that move into D. FIGURE 3 - RIMM 50 TICK Obviously, as with any tool for reading the market, the support and resistance zones are just one factor in a larger picture. Figure 3 shows a great example from this afternoon where the trend channel support/resistance action in play. The initial trend channel can be drawn by connecting A to B and then extending that line downward and then connecting 1 to 2 and doing the same. Notice that the selling increased with each downside move. This pushed the prices into that lower trend channel more than if the prices had declined at a similar rate as before. Hence, the support had more "give" to it. After bouncing back, the channel held again at D, forming a smaller and slower drop around 15:20 ET. The door was

33 now open for a confirmation of the trend change. FIGURE 4 - RIMM 50 TICK Another example soon followed in Figure 4. What I want you to pay attention to here is that when RIMM tested the upper trend channel at C, it did not immediately pull back off that level. Although earlier it had pulled off it gradually in D in Figure 3, this time it hugged it. Both of these are variations on the same thing: momentum change. By hugging the resistance level or pulling off it very slowly, it creates the scenario for that resistance level to break. Now, in this second example it attempted to do so too quickly, and hence congested longer, however the theory is still the same. Another example of the channels is found in GOOG from today in Figure 5. The channeling action in GOOG was a primary contributor to it being the main focus of my attention this afternoon. In GOOG we had a series of channels forming and breaking, each more bullish than the next. FIGURE 5 - GOOG 50 TICK

34 The first channel began right away out of the open. It was a slow downtrend into 10:00 ET. GOOG did not hit the exact price of the upper trend line at B, but it did come into that price zone. It then did not make it back to the lower end of the channel, instead stalling about halfway to where the lower channel line would be and rounded off. The stock returned to the upper channel, but again only held it a few minutes before breaking through. This trend break alone was not enough on the larger time frames to yet sustain an upside move. As the day progressed, however, the channel did as well. As a channel develops, the last segment of the channel often gains importance over the first. So, the result is that I am often changing my trend line to adapt. Drawing trend lines is more of an art than an exact science, which endlessly frustrates those traders trying to devise programs to display them automatically. Often I leave out extreme ticks when I am looking at a trend line, or I pay the greatest regard to the bodies of a candlestick chart and look for my trends to closely associate with them. FIGURE 6 - GOOG 50 TICK

35 Figure 6 shows the progression of the trend channel out of the open in GOOG. "B" had not quite touched the upper channel line, so I drew a new one to project out the upcoming support levels. Notice that the move into 10:15 ET corresponded to the previous low, which is another major type of support level. Of course the time of the day also factors in. In terms of the channel, however, that resistance from the trend channel on the upper end of it, when extended, quickly became the support only 15 minutes after it had broken. FIGURE 7 - GOOG 1 MINUTE

36 Figure 7 takes this channel out further and looks at the larger channel of the formation this morning. #1 is the support level we were just looking at. It held and a higher high was made, but still under the initial morning lows. By pulling back again into 11:00 ET, it formed a second low to create a symmetrical triangle. At that point, once the prices began to move higher at about 11:15 ET, the highs from A and B could be linked and extended, as could the lows from 1 and 2. Notice that as GOOG moved higher into 11:30 ET, when it hit that upper channel, it hugged it throughout the majority of that mid-day correction into noon off that high. This continued to develop the bullish bias in the stock into the early afternoon. Again, when looking at the last segment of that trend channel, it became support once broken over noon, holding on lows around 12:30 ET and into 13:00 ET. This can be seen in Figure 8. FIGURE 8 - GOOG 1 MINUTE

37 With each pullback into the afternoon, the trend channel shifted. The first drop in the morning was the strongest, followed by a symmetrical triangle and then an ascending triangle, which is displayed below in Figure 9. At "D", GOOG had pulled up through the upper channel line. It is the pullback off that channel break that gave us the trigger for a buy off my post, creating a setup into 13:30 ET. It could have been taken off 13:00 or 13:15 on those smaller channel breaks had I seen it in time, but the one into 13:30 was a complete break of the entire day's channeling action. FIGURE 9 - GOOG 1 MINUTE

38 Once a channel breaks, momentum often changes. This is shown in Figure 10. At this point, you have to switch to larger trends for identifying upcoming resistance levels in the cases of moves higher and rely on the other technical tools in your arsenal to assist you. FIGURE 10 - GOOG 50 TICK

39 Figure 11 shows the channel accelerating. We put a target on it of $690 due to the whole number resistance with the 10s in GOOG. This was also equal move resistance and price resistance from about a week ago. So, while the trend channels and trend lines are something that can be highly beneficial, never rely purely on one type of support or resistance. The more types there are coming together and the more attributes there are coming from other technical tools to combine with it, the better. FIGURE 11 - GOOG 50 TICK Utilizing Support and Resistance Levels - Part 3 Applying moving averages to identify support and resistance levels. January 3, 2008 Good day! I hope that you had a wonderful holiday season and have not had to let our your belts by too much! For those of you who could not make it to the previous classes, the link for the logs is as follows: Support/Resistance Part 1: Support/Resistance Part 2: Over the past month I have been introducing you to some of the key aspects of using support and resistance levels in your market analysis and hence your trading. My first class in this series dealt with a basic introduction to support and resistance and using pure price support and resistance levels in your trading. In my second class we took price support and resistance a step further by applying trend lines and trend channels. In today's session, for the first time, we will be looking at another type of support and resistance which is based upon price, but

40 which falls into the category of an indicator. Indicators are the visual representation of mathematical calculations based upon price or volume activity. The indicators I will be covering today are very basic ones, which are used by a large percentage of the trading populace: moving averages. As those of you who know my style are aware of, I am not overly fond of indicators in general. Most of my trade decisions are based primarily upon price and volume activity. There are a lot of popular forms of indicators that traders use for support and resistance. The problem is that it can be very easy to rely to heavily upon the indicators and ignore those underlying price clues. One of the few indicators I have ever used in my life are moving averages. Moving averages are lines drawn on your chart, typically by your charting platform (unless you live in some archaic world and are actually plotting your moving averages by hand). They are visual representations of the calculation of average price movement in a given period of time. For instance, a 20 day simple period moving average measures the average price of the past 20 days and marks that point on your current daily chart. Most moving averages are based upon the closing price of the time frame used. So, in this case, it would mean the closing prices of the past 20 days. In the case of a 5 minute 20 period simple moving average it would mean the past 20 5 minute bars. It is called a "moving" average because the calculations are being constantly adjusted and plotted as prices develop. Traders tend to stick to two main forms of moving averages: simple moving averages (such as those mentioned above) and exponential moving averages. Some traders get more fancy than these alone, but let's not stray too far off the beaten path. Simple moving averages (aka arithmetic moving averages) are calculated by adding those closing prices for that given span of time and then dividing this total by the number of time periods (i.e. the 20 days). Exponential moving averages are similar but they give more weight to the most recent data. I've always used simple moving averages myself. They have suited me well and for that reason alone I've never had the desire to try anything else. "If it's not broken, don't fix it," is the saying that aptly applies here. Many professionals of my acquaintance use only exponential moving averages and swear by them though, so it's somewhat in the eye of the beholder. The main thing is to avoid flipping back and forth once you've picked a side. There are many time periods used for measuring moving averages. Once again I fall back on the most common. These are the 10, 20, 50, 100 and 200 period simple moving averages. Intraday, however, I don't ever display anything other than the 20 and 200 on my charts. I've just found these two to be the most influential on that time frame. These days I do not even have moving averages on many of my charts anymore since I use price action to show me the support and resistance levels, but for those who are struggling to get a grasp on where prices are likely to stall or reverse, they are extremely useful as visual clues. Like any indicator, however, you cannot rely on a moving average alone to tell you prices will stall or reverse. It is just one tool you should be using. It is more powerful when combined with other forms of support and resistance and it's also more powerful when pace, volume, trend placement and correction periods are interacting in a positive manner at the time the moving average hits. You can learn more about these in my CD course at which covers all of these topics in detail. One thing to remember, which I covered in the previous classes, is that all types of support or

41 resistance are merely price zones. While a moving average may have one exact price at any given time, it is not that perfect price that typically matters, but rather the zone of that price. Think of it as having some cushion to it. Moving averages often have more cushion than the other forms of price support and resistance because every charting platform tends to differ slightly in their calculation of what the moving average is. It tends to be very dangerous to use moving averages for stops and trailing stops as a result, since it is very easy to miscalculate just how much cushion you should give it. It could be argued that the reasons moving averages work so well as support and resistance levels are because they are followed so widely and hence have a lot of the self-fulfillment characteristic to them. For whatever reason, however, the fact remains that they do. Please take a look at Figure 1 of the QQQQ. This chart displays the most widely followed moving averages and how they serve as both support and resistance. Throughout the entire uptrend in the QQQQ, each of these moving average levels stalled the price action for at least several days. In most instances the prices then congested following the test of the moving average, bouncing around in the zone of the moving average before breaking higher. Once each moving average level broke, it then became support. The most notable ones are the 10 and 20 day simple moving averages. FIGURE 1 - Major Moving Averages Figure 2 shows a close-up of the beginning of the price action from the previous chart. When support and resistance levels hit for the first time, that is when they are often the most powerful. In the case of moving averages, when you look at a daily time frame for instance, the first day each of these major moving averages hit held the resistance zone of the moving average almost exactly. When I am taking a position intraday, I almost always look to see where the major moving average price levels are on that daily time frame, because I know how difficult it will be to break through them the first day they are tested. Keep in mind, however, that at time a daily moving average may strike intraday, correct for a few hours intraday, and then still break, or, with enough momentum, break anyway. So, while this is a

42 good tip to keep in mind, like all tools, it does not work each and every time. FIGURE 2 - First Test of Moving Average One of the things moving averages are used for is to identify trends and to assist in calculating pullback levels within a trend. Figure 3 shows a typical uptrend on the daily chart of the QQQQ. While the QQQQ spent a great deal of time hanging out at the 10 day simple moving average, it was the 20 day simple moving average that served as the larger support for the trend as a whole. Prices did puncture the moving average to some degree at each test of that support zone, but the zone itself held. Most trends will use the 20 period simple moving average for support, but stronger momentum may hold only a 10 sma, whereas a slower trend may use the 50 sma. FIGURE 3 - Moving Averages and Trends

43 When a trend is not clear, as in a sideways congestion zone, then moving averages tend to loose some of their power. Figure 4 shows such an example. The 20 period simple moving average held for the most part when tested on the first day of a price move, but instead of causing a reversal, the moving average gave way fairly quickly in successive sessions. FIGURE 4 - Moving Averages and Trading Ranges #1 Another example of this can be seen in Figure 5 where the NQ has struck the 5 minute 20 period simple moving average on numerous occasions, but up until the very last test of it in "D" it managed to break through the support and resistance formed by the moving average within about 15 to 20 minutes. At "D" the prices began to congest at the upper end of the

44 channel and based sideways while the moving average caught up to the prices instead of the moving average hitting as a result of a pullback or bounce into it. The result was that it eventually gave way to a breakout higher. FIGURE 5 - Moving Averages and Trading Ranges #2 In the examples of the trading ranges, you may have noticed that many times the moving average was tested for several bars in a row before breaking through the moving average. When a moving average does this, it can be considered to be "hugging" the moving average. This means that is it tested on multiple occasions without really bouncing or falling off it to any large extent. An example of this on a larger scale is shown in Figure 6. I love to see this type of price action, because it often indicates that the support or resistance is weakening and eventually will break through it. There is a time factor that must be considered, but in and of itself, this is a wonderful concept to watch for. Figure 6 shows example of it as both a short setup in October as a minor break and then a major break into early November, as well as the more obvious buy setup in late November. FIGURE 6 - Prices Hugging Moving Averages

45 I hope that you have enjoyed this class! On January 17th I will be covering yet another form of indicator support and resistance: Fibonacci levels. For those of you whom are futures traders, you may find that class to be particularly helpful. A All my best, Toni Utilizing Support and Resistance Levels - Part 4 Applying fibonacci levels to identify support and resistance. January 17, 2008 Good day! For those of you who could not make it to the previous classes, the link for the logs are as follows: Support/Resistance Part 1: Support/Resistance Part 2: Support/Resistance Part 3: Over the last couple of months we have been looking at different types of support and resistance levels, starting with the core price support and resistance and then applying it to channels, followed by moving averages. In today's session I am going to show you another type of indicator support/resistance tool. I will be giving an overview on utilizing fibonacci retracement levels in your trading. The Fibonacci Series upon which these levels are based upon is a result of the work of an Italian mathematician named Leonardo Pisano, which went by the name "Fibonacci". In case this sounds a bit odd, it is merely a contraction for "Son of Bonacio", who was his father. He

46 observed that in nature there are certain patterns that appear to crop up and introduced a series of numbers to identify these patterns. The sequence of the Fibonacci numbers is as follows: 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, up to infinity. Starting with zero and adding one begins the series. The calculation takes the sum of the two numbers and adds it to the second number in the addition. This is very exciting to you I am sure up to this point! :) Where Fibonacci comes into play in the market, however, is that after the eighth sequence of calculations, there are constant relationships that can be derived from the series. For example, if you divide the former number by the latter, it yields /55 = ~ /89 = ~ /144 = ~.618 Dividing the latter number by the former number derives another relationship from the sequence. This relationship yields approximately /34 = ~ /55 = ~ /89 = ~ Traders use these ratios to make projects upon a stock or commodity's price moves. When I first began trading, a friend of mine introduced me to the fibonacci series. Coming from a background in archaeology, I was already aware of its application in other areas, so it intrigued me that it would also work in the market. I began to play around with Fib levels. I kept it very simple. The main Fib levels I use are listed on our charts page. They are 138.2%, 100%, 61.8%, 50%, 38.2%, 0%, and -38.2%. Two other numbers often used when applying Fibonacci numbers to chart analysis, and 1.27, are the square roots of and I do not use these myself and never have, but you will likely see them referenced from time to time if you decide to go more in depth in studying Fib levels. FIGURE 1 - Fibonacci Levels

47 I began as an equities trader, but I quickly discovered that while Fib levels will work in the equities market, the probability is even higher in the commodities market. I have no idea why this seems to be true, but for that reason, I tend to use them more when trading the EMinis than anything else. Now, those of you that know me well know that I actually use very little for indicators anymore and often do not even show my moving averages, but this has more to do with being able to read the pace and use price support and resistance for identifying the turning points in the market and less to do with the validity of the indicators. I just like to keep things the least cluttered as possible. Both moving averages and Fibonacci levels, however, are very good visual tools to assist in identifying major support and resistance levels in the market. As a bit of a quick review, remember that as with any support or resistance level, the faster the momentum or pace of a move into a fibonacci level, the more give it will have. We will see this a little later using an example from this morning of a support level I called in the room. One of the things people tend to find daunting with fibonacci levels is exactly how to draw them. They get rather wrapped up in what trend move to use to apply the tool too. In all honesty, it doesn't really matter, as long as you deal with a complete trend move. What this means is that if you are looking at a downtrend, then once you no longer have lower lows and lower highs then you can use that trend move to apply the fibonacci levels to. Trend channels, as discussed several weeks ago, are also a helpful tool, since once a trend channel breaks, that means you can also use that trend move to apply fibs to. Let us look at a couple of examples. Please refer to Figure 2. FIGURE 2 - ES Fibonacci Support/Resistance

48 This is the trend move that we were following yesterday morning. It contained the typical three waves and was the breakdown move out of the prior day's congestion. Once the downtrend channel broke shortly after 11:00 am ET, then you can use your trend tool set to fibonacci and connect the highs of the downtrend move to the lows of the downtrend move. This projects each of the fibonacci levels from that point onward. What I find intriguing about Fibonacci levels is that when I draw them on a major trend move, such as on a 15 minute time frame, if I leave them in place overnight, the will continue to hold in days to come, even as more trends are created on that same time frame. Obviously if you continue to do this without cleaning it up then your charts will become rather cluttered though! FIGURE 3 - ES Fibonacci Support/Resistance

49 The image in Figure 3 is the same one as in the previous chart, but it shows the projections of the fibs, along with the s/r levels identified. Notice that heading into noon the momentum was on the stronger side, so on the second wave of upside off the lows, after first stalling at the 38.2% retracement, the ES continued past the 50% level and into the 61.8% zone. When a continuation pattern is forming, it is rather common to see a security chop around between the 38.2% level and 61.8% level before breaking higher. You can use this to help project price targets on a breakout. When the prices are evenly displaced between those two levels, then the price projection on a breakout is also an equal move projection as per our discussion on pure price support and resistance levels from early last month. FIGURE 4 - YM Fibonacci Support/Resistance

50 Fibonacci levels are not limited to the retracements within a trend move. They can also project price targets and support and resistance levels and lay outside the scope of the trend move itself. For instance, if we look at the three wave trend lower into almost 12:30 on the 11th off the 11:30 ET highs, then we can connect the highs of that trend to the lows of that trend move on this smaller 2 minute time frame. It retraced back into the 61.8% level before continuing lower. FIGURE 5 - YM Fibonacci Support/Resistance

51 When it broke lower into 13:00 ET (as shown on Figure 5), you will see that it proceeded to the next Fibonacci level. In this case it was the -38.2% retracement. This helped predict a bounce off that price zone. The YM then fell into a range between the 0% and -38.2% retracement levels before triggering a third wave of selling into 15:15 pm ET. FIGURE 6 - YM Fibonacci Support/Resistance By stepping back a time frame to the 5 minute charts, once can more easily discern this new trend. It had three strong waves of selling and then reversed into the close. FIGURE 7 - YM Fibonacci Support/Resistance

52 Following that reversal, the first resistance it ran into was a combination of not only the price congestion from mid-afternoon, but it hit the 38.2% fibonacci retracement level on the head. When dealing with congestion zones, it can be a little difficult knowing where in that zone the move will stall. By adding a fibonacci level, it can help narrow down the price a bit more accurately. The second resistance level after the lows was also a price resistance level at the prior highs. This was the 100% fib retracement. After prices reversed at that point, they fell into the 61.8% level and held almost perfectly once again. Again, however, also note the price support from the previous day. Whenever you have these combinations of support or resistance zones, those levels are going to have more strength to them. If you want confidence, this is one way to build it. If you cannot identify more than one reason for a support or resistance level to hold, the chances are less that it actually will, or that it will to any significant degree. FIGURE 8 - ES Fibonacci Support/Resistance

53 Fibonacci levels work for both intraday and all sessions time frames in the commodities market. The term "all sessions" refers to trades taking place outside the 9:30-16:00 ET time frame. I actually didn't get to sleep last night because I was trading the ES at that time. :) After catching the 3:00 ET reversal, I wanted a way to project price levels for support as the morning progressed. Knowing I had this class today, I threw up the FIb levels for the ES based upon that morning rally which began at about 23:00 yesterday evening. FIGURE 9 - ES Fibonacci Support/Resistance

54 While not perfect, notice that each of the major stalling points on the 3 minute time frame fell at a Fibonacci price zone. When the market fell apart at 7:00 am ET it barely took a second to notice the 100% retracement level and dropped into the 138.2% instead. Since the momentum was so extreme, the exact prices surpassed the exact price of the fib level, but notice how it still congested at it. This shows that despite the slightly lower lows, it still reacted to that fib zone. The market then popped back into the 100% retracement level and continued later on into the 38.2%. Once again the was on stronger momentum. Heading into the open it fell back into the 100% and price support. This is at #5. FIGURE 10 - ES Fibonacci Support/Resistance

55 As trading continued past the open, these fib levels from the wee hours of the morning continued to hold. The resistance level I gave early in the day at 9:53 was based upon the 50% retracement, which combined with earlier price congestion. The support I then posted at 10:04 was a reflection of the 138.2% retracement, as well as prior lows (#1). FIGURE 11 - ES Fibonacci Support/Resistance

56 Since that move from around 3 am to 7:30 am broke higher just prior to the open, another set of fib lines could be drawn, or adjusted, to fit the new trend. This trend off the lows was choppier and only broke around 10:00 when it failed a new high, making it a two-wave correction move instead of three-wave uptrend. You could use that move, however, to then project lows at the 138.2% retracement. Some may have used the 8:30 am low to the 9:00 ET high and just watched that more concise move. The zone of the 138.2% on that would have been about the same. You would have had to have considered the fact that the momentum was very sharp into the low, hence adding a bit more give to it. The Fib levels drawn early in the day, however, continued throughout the session. FIGURE 12 - ES Fibonacci Support/Resistance Hopefully, for those of you looking to add a bit more assistance in identifying s/r levels, you will find these fibonacci levels to be extremely helpful. There are other applications of fibonacci in the marketplace as well. Some use them for time extensions to help identify how much longer it will be until another reversal. For this they will use a trend move, calculate the time of that trend move and project the fib levels out in terms of time. Lucas numbers or levels are another application of similar principles of fibonacci that many traders use. So, if inclined to follow this line of study, these are two additional areas you may wish to explore. I will now open the room up for questions... jball: good stuff Toni: ty jerry trauma: thanks Toni

57 billgi: very helpful crack32: what fibonacci retracement do u need to buy minolo's on sale? Toni: lol six_: can Fibo levels be used to trade stocks intraday Toni: 12 yes six_: thanks, Toni Helena1045: What fib level did we achieve today? :) Toni: just a sec... i will show you :) We are at the -38.2% on the daily off that last trend move on the ES btw FIGURE 13 - ES Fibonacci Support/Resistance

58 NCM during 2009 candlestick chart Within this chart is a couple of noticeable spots where the price jumped or fell while gapping across certain price ranges. September 2nd prices closed at $ The next morning they gapped up to $31.30 missing most of the $29 - $31 range. October 6th the prices closed at $ The next morning the price jumped to $ December 4th NCM closed at $ The next trading day it opened at $37.00 and continued to fall without once trading in the $37 range. Gap-ups and Gap-downs When prices jump right up through a trading range this is called a gap-up. This will often occur when positive news is released while the market is closed, or when a major event occurs such as earnings reports and has an unexpected upside surprise. Gap-downs occur when prices jump downward and skip a price range. As well, negative news after the market closes or negative EPS surprises can be the cause of such an effect. The Major Types of Gaps Gaps are usually categorized in four major classes: common, exhaustion, breakaway, and runaway. It is important to know which type of gap fits the data since the trading may continue in the direction of the large move, it may reverse direction, or the price may retreat and then resume its normal direction. The Common Gap Also termed area gaps or trading gaps, these leaps in price movement are common and uneventful. The market psychology will change somewhat between market closing and opening the next trading day. When the market opens significantly different the next morning

59 with little apparent reason, and it does not fit the mentality of the other gap types, it will likely be a common gap. Common gaps are usually filled in quite quickly. Filling in means the price reverses the direction of the gap, if only temporarily, and then resumes trading. Often, the gaps are filled the same day. September 3rd, NCM closed at $ The morning of September 4th had the price opening at $ The price jumped almost four percent overnight. But the price slid during the day and closed three cents lower than the September 3rd. NCM Common Gap-up The Exhaustion Gap After prices have been either trending up or down for a while, the sentiment may be nearing exhaustion. Imagine a stock trading downwards for a long period of time despite company restructuring and improvement of the bottom line. After a long while, the last of the weak hands finally give up and sell off the remainder of their stock in despair. It is quickly bought up by bargain hunters or technical analysts, the price may find solid ground and can reverse the trend. Conversely, perhaps the stock has been climbing for some time in an upwards trend. As euphoria reaches an all time high, the price gaps up. The last of the buyers come out of the woodwork thinking this is a sure bet as the current stock holders dump their shares in great quantity. After this initial transfer and no new buyers, the price reverses direction. Look for these two requirements when trying to decide if the gap is an exhaustion gap. Extremely high volume (perhaps 2x the normal) After a long-time trend has been in place Examining NCM at an earlier date, we will examine the blue area that shows a reversal from a downtrend to an uptrend.

60 NCM Exhaustion Gap Next we will zoom in to look at the price gap and volume a little more closely. NCM Exhaustion Gap Note the two blue circles. One shows the gap on the char, the other shows the volume spike during those trades. Because this occurs at the end of a very long down-trend, we can assume the price will fill and reverse which it does.

61 Breakaway Gaps This type of gap is considered a breakout. Prices will usually go through stages of trending, then consolidation, and back to trending again. Sometimes, after a consolidation pattern, or after toying with a support and resistance, prices will breakaway. Prices break upwards or downward through support or resistance Volume increases The trend usually continues Notice on the stock ALL how the price consolidates. When the price finally jumps down to break resistance, the volume also increases. ALL Breakaway Gap Runaway or Continuation Gaps The final class of gap is one that occurs in the middle of a trend. Perhaps the stock is moving up at a measured pace. Suddenly there is an increase of interest in the stock and the price gaps up and continues to trade in the former trend. Or the stock may be declining over time and there is an increased bearish sentiment in the stock and the price gaps downward and continues to trade lower.

62 CPU Continuation Gap As can be seen in CPU.AX, the trend is in the middle of its movement when a couple of minor gaps occur with decent volume as the trend continues. Should You Play the Gap? There are numerous ways to play gaps. Some will day-trade them, others will use them as signals needing confirmation for a reversal, fade the gap, and so on. Still others will shy away from them altogether since such a drastic change in price can have large repercussions if the investor plays the gap wrong. If you are interested in profiting from gaps, you will first need to get very proficient at telling one from another. Make sure you examine support and resistance levels, if the gap is at the middle of a trend or at the late stages of it, and if volume is a supporting factor.