Today was an awesome and crazy day to trade. There was a big move in oil at the open. Then we had a 5 year Treasury auction, followed by FOMC action. All this can make for stressful trading. Here are some tools to help us anticipate price action like we had today. Hopefully the following will be useful.
Linear Regression Channels
Parallel and equidistant lines are drawn two standard deviations above and below a Linear Regression trendline. The distance between the channel lines and the regression line is the greatest distance that any one closing price is from the regression line. Regression Channels contain price movement, the bottom channel line provides support and the top channel line provides resistance. Prices may extend outside of the channel for a short period of time but when prices remain outside the channel for a longer period of time, a reversal in trend may be indicated. (Prophet.Net TA Glossary)
Watching oil last week there were many names that looked overextended. We’re talking about short-term trading here. Using a 50% linear regression channel can give us an idea of just how far price has gone. The beauty of LR channels is price reverting to the mean. There is finesse on entering with the most powerful time frame, but these give high probability setups.
The previous Friday RIG closed above a three month channel line. Then it collapsed on Monday with a gap down open. That was a missed trade. Tuesday gave another opportunity to short RIG at the close and it worked on today’s open.
So on Tuesday it couldn’t close above the prior high, even with volume coming in. There is a divergence in OBV on the 60 day chart, which trumps the 10 day trend in on balance volume. The larger time frame also shows declining volume with higher prices. Usually a good warning sign.
Here is the intraday chart for reference. Price tested the prior day’s close and immediately failed. It was fast easy money. Low risk traders took their profits. Does RIG have more downside potential? It’s probable, but the easy trade is now over.
ThinkScripter Indicators
If you use the ToS platform visiting ThinkScripter is a must. The /ES chart uses these indicators:
http://www.thinkscripter.com/2009/05/13/four-volume/
http://www.thinkscripter.com/2009/03/12/previous-days-regular-hours-highlowclose/
http://www.thinkscripter.com/2009/02/23/tick-trin-indicator/
Heikin-Ashi bars
S&P 500
This chart should be fairly self-explanatory. One of the things that stands out is the Four Volume divergence. As the market was pushing higher, after the FOMC “no change” announcement, internal volume was turning down. This was a very good clue to look for a reversal. A low risk countertrend entry was to short at the 1075.75 pivot. Heikin-Ashi bars are useful for staying in the trend or seeing a trend more clearly.
Using LR channels we’d know that TNA was getting overdone and could look to long TZA soon. Check out that hammer on TNA’s weekly chart. The small yellow circle is from Sept. 1st when TNA touched the lower three month channel (see chart). That coincides with the median line on the entire price history channel. Pretty sweet huh!
Here’s the TZA intraday chart for trading FOMC news. The first entry was right off a Person’s Pivot. The tick high at 1300 also gave a low risk countertrend entry. The sharp upturn on CCI was also a good clue to get long. Lastly we see Alexander Elder’s famous “kanagroo tail” pattern. That’s four strong signals to get in the trade.
