- We have three Pattern Signals fired for today's trading in the Dow Jones, the first of which is the NR7. This signal tells us that the market has gone through a period of contraction with Friday's range being the narrowest of the last seven. If the market were thought of as a spring gradually being compressed, this signal represents a potential trigger point for releasing that pressure. A good clue as to if and which direction it might break can be determined by today's market action near Friday's 8708 high and 8623 low levels. A break of either is a likely indication of the new trend direction out of this contraction period. An aggressive trader can enter on the break. A conservative trader might want to wait until a return to the breakout level, which often happens before a sustained move begins.Some initial clues to breakout direction can often come from early rejections of these levels. If the high is approached, repelled, and price then moves through the DP, the likely breakout direction is the low. Likewise, if the low is approached, repelled, and price goes through the DP from below, the likely breakout direction is the high. Another clue can often be found in price action near the DP. If price is unable to move through this level, the likely breakout direction will be the same side as it originated.
The second Pattern Signal fired for today is the 2 Day ROC Buy. This signal is the Raschke and Connors way of quantifying the swing trading methods as taught by the Taylor Trading Technique. This technique teaches that there is a natural pattern to the sequence of buy and sell days. The 2 Day ROC Buy signal is telling us to expect today to be the "buy day" part of that pattern.
The third Pattern Signal fired for today's trading is the Low Breakout Continuation. This one is a little different than the bulk of the signals that we normally incorporate. Rather than creating a directional bias for the trading day, it points to a likely market development IF an additional condition is met.
The setup for the Low Breakout Continuation signal includes (1) the signal day's low is within the middle 20% of the prior day's range, and (2) the signal day's high is higher than the prior day's high. If on the day following the signal day (today's trading), the low of the previous day happens to be taken out (Friday's low) then the probabilities of a continuation trend move downward is very high.
This signal is NOT setting up a directional bias for today's trading. Rather, it is indicating that if the prior day's low happens to be taken out, we want to be on board the downward move because odds are it has further to go.
Chart created by Tradestation. |
On the Dow Jones Half Day Chart, the 5 period Double Stoch indicator moved lower with Friday's activity, while both the 7 period %K and 10 period Double Stoch Indicators moved sideways within overbought levels. This does not necessarily mean that we should expect them to soon turn. If short term cyclical patterns have returned to normal behavior, we should see a period of topping action develop before they launch their next cycle lower. Our first clue will come from a downturn in the 7 period %K. A turn of this indicator from its overbought or oversold zone is usually a good indication that a new trend has begun and at least several more bars of new short term direction should follow.
The only economic report of significance on today's agenda is Leading Economic Indicators, released at 9:00CT.
ADX levels on 15, 30, 60, and 120 minute charts are above a value of 30, indicating that the trend to higher prices is still intact in these timeframes (see ADX charts below). If we were triggered into a long position by a price reversal pattern and/or Oscillator Divergence near the 20EMA in any of these timeframes, we would have the makings of a Holy Grail setup. A trade based in part on a Holy Grail pattern can take as its minimum profit target a return to the most recent swing pivot extreme, which would be Friday's 8708 high. If the move to that level can occur on Momentum Confirmation, there should be even more upside in the making.
The ADX level on the 5 minute chart is very near a value of 18. When this occurs, we know that it is a good time to keep an eye out for any developing triangles, wedges, flags, or channels in this time frame. We can use breakouts from these patterns as either a trigger into a trade or to help determine directional bias.
Even though the 2 Day ROC Buy signal is suggesting further upside, the NR7 signal will likely be the real key to today's trading. Whenever a Narrow Range Day Pattern Signal fires we can go into the trading day with two key pieces of information at our side. 1) We know that in all likelihood, price activity should essentially trend in one primary direction. And (2) clues to the direction of the potential trend day breakout will most likely be determined by price action relative to the prior day's high and low, and to today's DP as described above.
Keep in mind, also, that the firing of our Low Breakout Continuation signal is telling us that if Friday's 8623 low happens to be taken out, the downmove most likely has further to go and we want to be on board. Significant activity below the 8676 level of the Daily Pivot will be our earliest warning.
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