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PureBytes Links
Trading Reference Links
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Auto Group:
http://photos.yahoo.com/bc/hcour/vwp?.dir=/&.dnm=Auto+Manufacturing.GI
F&.src=ph&.view=t&.hires=t
GM Daily:
http://photos.yahoo.com/bc/hcour/vwp?.dir=/&.dnm=GM+Daily.GIF&.src=ph&;
.view=t&.hires=t
GM PnF:
http://photos.yahoo.com/bc/hcour/vwp?.dir=/&.dnm=GM+PnF.GIF&.src=ph&.v
iew=t&.hires=t
Much interest has been expressed about PnF charts here lately. I'm
fairly new to PnF. I use the Wyckoff method which is a little
different than other methods. For instance, Wyckoff uses a horizontal
count, you can have X's and O's in the same column, and a column must
have at least 2 entries. It is also used in conjunction w/other
Wyckoff principles, such as the Selling/Buying Climax, the Secondary
Test, Upthrusts and Shakeouts and so on. I'll explain some of these
concepts using a current trade.
Wyckoff is a bottom/top feeder. Using the scan I talked about in an
earlier post which finds groups that are gathering positive upside
momentum in both price and relative strength, I look for stocks w/in
those groups that are exhibiting good Wyckoff price/volume behavior
after a possible selling climax. In this instance the Auto - Major
Manufacturer group was positive. Chart included.
Looking at the GM daily chart. Preceeding a SC is usually Preliminary
Support (PS). The PS may later act as important support/resistance in
the subsequent range, as it does here. A SC usually occurs on
excessive volume after a prolonged decline. Note the extremely high
down vol in GM on 10/8 & 10/9, the very sharp down move, and the long
spreads closing on the lows. A classic possible SC. I say "possible"
because a SC must first be confirmed by a test to validate it.
The SC is followed by the Automatic Reaction, AR, which is a sharp
rally usually lasting a week or two. The SC and AR define the trading
range and everything that happen afterwards is measured against the
low and high of this range. The AR occurs because supply has been (at
least temporarily) exhausted during the SC and the question now
becomes: Will the pro's step in to support the low or will selling
continue? Note the very high down vol on 10/16 (circled). This is
actually a very positive sign because there is no immediate follow-
thru to the downside. In fact price holds above the 50% level of the
range for the following 9 bars. The 50% level is familiar to many
traders and is a crucial level of any rally/reaction.
On 10/30 & 10/31 we have the Secondary Test. Again, classic Wyckoff,
occuring on much lower vol than the SC (the selling is drying up) and
support comes in at a much higher level than the SC (price cannot be
pushed down further). Note also the narrow spread on 10/30 compared
to the wider spreads of the SC and the positive close the following
day.
Price now recovers back into the top half of the range and proceeds
to form a symmetrical triangle, while remaining w/in the top half of
the range. Several things happen here: Volatility winds down as the
daily spreads and price movement narrow (compare these last spreads
to those at the beginning of the range); volume contracts toward the
apex of the triangle; the 20d ema (blue line) flattens out and
becomes support where it was once resistance; price hugs the both the
upper triangle trendline and the longer-term down trendline (purple
line). And finally, 11/13 is a test of the ST, again positive on even
lower vol and a very shallow retracement. Note the close at 50%R and
way off the low of the day. This is a Shakeout, which does just what
it sounds like: Shakes out traders looking to sell/short at an
important support/resistance level. Wyckoff refers to this confluence
of events as "on the hinge", his version of the triangle pattern, and
is often a prelude to a sharp breakout or breakdown. The positive
price/vol behavior at this point suggests a bo. The indices were also
on the hinge at this point, especially the NYSE and S&P 500. So I
went long. I practice very strict reward/risk and money management
and this was a good one in those respects.
Now for the price objective (PO) and PnF. One can clearly see the
SC/AR/ST and final test (last reaction low) on the PnF chart. This is
a great advantage, as the
positive support and resistance w/in the range are quite obvious
here. As for the count, there are several ways to go about it. I
always choose a conservative count. From the 11/13 last reaction low
(that test of the test) horizontally across to the SC there is a
count of 13 or 14 from the line at 33, which is 46 or 47. This is
where PnF helps me. Looking to the left of any bar chart there is s/r
of varying degrees everywhere. The PO gives one a target that is both
reasonable and somewhat daring. One can clearly see on the daily
chart the nearest important resistance at whole number 40-ish, but
the PnF count goes beyond that. So in this situation I choose the 50%
level between the two as the most conservative for me. In this case
about 43. And if/when I hit my r/r ratio, I become even more
conservative.
Harold
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