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Per many email requests, here is the Fib stuff!
Enjoy..
-Neal.
-----------------------------
The following is intended as a demonstration of DiNapoli techniques.
It is not intended as a market forecast or trade advisory. Although
this example focuses in Fibonacci techniques for intraday scalpers, the
same techniques are applicable for longer-term position trades. Scalping
intraday trades is for the experienced only, it's one of the quickest
ways to lose a lot of money, unless you know what you're doing!
This information is extracted from client mentoring web pages and is
distributed with
the permission of Coast Investment Software Inc, for more details see their
website at
http://www.fibtrader.com
QQQ Daily and Weekly studies dramatically effect the lives of intraday
scalpers.
The support and resistance levels that can be predicted from Daily and higher
time-frames are often ignored by short-term traders (unfortunately). Price
will be moving
happily in one direction on a 5-minute chart, then will suddenly stop or
bounce back, as
though it's hit a wall. Look at the charts below, imagine you knew of these
predicted support
and resistance levels in advance. With the luxury of watching intraday
ticks, you could
be prepared to take action or stand aside at any of these levels, based on
price action..
Fibonacci techniques are a powerful tool. But as with all technical
studies, they require
knowledge and experience. These are not intended to be simple buy/sell
signals. Whether you
trade long or short at any Fib level, and how you vary the size of your
trade, depends on other
criteria, which we call "context". This demonstration focuses only on the
Fibonacci aspect.
This example uses 60-minute charts in order to show enough of the
longer-term (daily) chart,
and still show enough detail to demonstrate how short-term traders would
use this information.
Image 1 shows recent price action on QQQ. Imagine price action had stopped
shortly after
the low of $79.50 on May 10th. Using that low, and prior highs, we are able
to calculate
future Fib resistance. For each prior reaction, we calculate two resistance
levels. These are
shown on Image 1, there is a green & red pair of resistance points for each
reaction.
Image 2 shows the actual calculation.
IMAGE 1.
http://www.fibtrader.com/charts/qqq_1_nh.gif
IMAGE 2.
http://www.fibtrader.com/charts/qqq_2_nh.gif
Notice how price action responded to the predicted resistance levels to the
right of the
Focus number. Some resistance levels are more significant than others. In
this chart, price
met with notable resistance at most of the Fib levels. For reasons beyond
the scope of this
example, the high on May 12 would be a predictable place to go short. Both
our daily and weekly
trend indicators were pointing down at that time. Similarly, the area of
the high on May 16th is
a good place to take profits, lighten up on long positions, but not
necessarily a good place to
go short.
But we've gone ahead too far. Let's back up and look at Image 3. Imagine
time had stopped just
beyond the high on May 12th, marked as "Focus" on that chart. We can
calculate two Fibonacci
support levels into the future, marked on the chart with a red and green
horizontal bar.
Image 4 shows that actual calculation. As a 5-minute or intraday scalper,
it would have been
beneficial to know where those two support levels were, if you calculated
them in advance..
IMAGE 3.
http://www.fibtrader.com/charts/qqq_3_nh.gif
IMAGE 4.
http://www.fibtrader.com/charts/qqq_4_nh.gif
So far we have used the concept of Fibonacci Retracements, to calculate
future support and
resistance. Now let's look at the concept of Fibonacci Expansions. Imagine
you had entered a
long position somewhere near point C on May 15th.. (See image 5). Where
would you take a profit?
In the DiNapoli method of trading, we use the A, B, C, swing points (shown
in Image 5) to calculate
three "Logical Profit Objectives". The calculation is shown in Image 6. The
profit objectives are
called COP, OP, XOP, for "contracted profit objective", "profit objective",
and "expanded profit
objective".
QQQ reached the COP very quickly, reached the XOP on the 16th of May. And
it may still reach
the XOP, though this is not guaranteed.
IMAGE 5.
http://www.fibtrader.com/charts/qqq_5_nh.gif
IMAGE 6.
http://www.fibtrader.com/charts/qqq_6_nh.gif
Now here is the interesting part! Notice where the XOP is on Image 5,
compare that to where the
highest predicted (red) resistance area is on Image 1. They are close to
each other. This is
called "Agreement" in DiNapoli-Levels terminology. This is an area of more
than usual resistance.
This is the reason I said that we should consider taking profits at this
time (for long trades).
But it is not necessarily a good time to go short (yet). There could well
be a short-term
down-move from that level, but until the daily trend gets in sync with the
weekly trend
(ie when both are showing a downtrend), it's more dangerous to take a short
position.
Actually, for very short-term scalping, the daily trend tells us to go
long, rather than
short. We could wait for a retracement after the 16th, buy the next dip and
sell a resulting
rally. But that big weekly downtrend is overhead. Be careful!
Take care,
-Neal.
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