As I've said, the market will tell one what to do if only one is able and willing to listen. Unfortunately, nearly all traders, particularly beginners, have become deaf, partly due to vendor clamor and financial media assaults but also from what has by now become a virtually infinite pile of books, articles, monographs and whatnot. And we don't even have to go into indicator and pattern territory.
The bars, lines, angles, points, levels, candles and so forth have been presented as something akin to a giant ball of string, the center of which contains the answer to all of tradingâs mysteries. If only we can ravel it, we have it made. Iâve been guilty of this myself with my boxes, striving to make things simpler, and, perhaps, for some people, I have. But Iâve seen these boxes take on a character not unlike the Andromeda Strain, exponentially growing into a complex of lines and angles that threaten civilization as we know it.
But if one is going to trade price, none of this will work. One can eke out a marginal success by incorporating all this junk into his trading plan, but itâs not unlike trying to run a marathon on crutches. Unfortunately, stuffing all of it into a file cabinet in the mind and locking it away isnât easy, which is one reason why children are so much better at chart reading than adults.
One way of accomplishing this is to view the activities represented by the chart as a story. In some ways itâs like learning a new language, one which doesnât have the vocabulary of bars, lines, et al. When trying to do it, one finds himself translating his current language (the bars, etc) into the new one in order to struggle toward meaning, but, eventually, the old language is forgotten, or at least set aside, and one begins to think in the new one.
This story is a drama. Sometimes a comedy, sometimes a tragedy, sometimes a thriller. But a story nonetheless. It has been going on for long before the trader clicks on his computer and it will go on long after heâs clicked it off. This is the chief purpose of studying context: what has everyone been up to, what have they been doing, where have they been, where are they going, what do they want, what have they been trying to accomplish? Not unlike catching up on old episodes of a soap opera, if one does so he has at least some idea of whatâs going on when he enters this other world. If he doesnât, he has no idea whatâs going on, and by the time he gets up to speed, he will at least be all the way up to the first or second commercial break, unless heâs already lost so much money that he canât continue.
Try, then, to hear the story. Doing so will make many things clear and even logical that otherwise would seem arbitrary and capricious.
Iâm not going to start at yesterdayâs beginning. I donât have the time. Rather Iâm going to focus on that reversal. This will offer at least an introduction to a practical application of what Iâm talking about.
First, the context. I posted daily and hourly charts yesterday morning, premkt (the last two posts on p. 8, 10-post pages). Note again that the upper line of the daily is closing in on 40. Scrolling down to the hourly, one can see that the new channel that I plotted on the hourly was also closing in on 40. This makes 40 important, not because of a line or a trend or a trend channel but because traders have been trading, and their behavior â their wants and desires and fears and hopes and greed and tensions and anxieties â have brought them all to this point, like the invasion of Normandy. The convergence of lines is only a byproduct. What matters more is how and why traders arrived at this point.
So when the NY session opens, we have the ingredients for drama. Will traders test 40? Of course they will. What have they been working toward all this time? Thatâs why I said that the line of least resistance was up, and the reason why shorting at the open was most likely a non-starter.
Buyers make it all the way to 37, with a little help from sellers (sellers want to see higher prices too; they want to get the highest price possible then they begin to sell, which is why they so often provide so little resistance to buying pressures when buyers are on the move and why successful breakouts so often occur on unimpressive volume). Price then falls back to the midpoint of this rally, the 50-yard line, and buyers make another attempt at reaching sellersâ endzone. This occurs five more times before 1130ET, but the defensive line holds at 32/33 or higher every time.
Then they call in the big guns, the A-Team, and make one more effort to put it over the top, like a SWAT team with their battering ram, determined to break through the door and rescue the hostages. Will they make it? Will they fail? Can you stand it?
Using bmâs chart at the top of this page, 4 posts back,
note that buyers literally run toward a new high. This is an impressive effort, and the crowd cheers. However, they ran so hard and so fast that they neglected to bring along any reinforcements. Like an army rushing into an ambush, thereâs nobody at the rear. So when price runs headfirst into a wall, thereâs no underlying support; the move was too fast and too direct. And when price retreats, even slightly, those who bought on the way up freak, turn around, and sell what they just bought, feeding the frenzy and resulting in a cascade.
If one has his radio tuned to the correct channel and really listens to this story, heâll understand that the seven or eight bars after the high represent an effort to hold the line at the previous swing high. There were, after all, quite a few trades made at those levels beginning with the first attempt off the open. If he also understands the events leading up to the effort and the significance of the failure, he will further understand that shorting at that little retracement represented by the fifth through eighth bars is a reasonably safe choice, at least in terms of probability. If 40 werenât so important, and if buyers hadnât spent the entire morning trying to get to it and through it and failing every time, that would be different. But thatâs not the story here. So when the first intimations of disaster present themselves in the 1204 bar, the seller who shorted this can sit back and enjoy the show.
Now isnât that more interesting than a bunch of bars and candles?
