R2K Intraday Rally, Stall, Fall

03/11/10 01:20:28 PM

by Donald W. Pendergast, Jr.

By watching the reaction of prices in areas of trendline/Fibonacci support and resistance levels, traders can gain extra confidence as they anticipate strong reversal and continuation moves.

Security: TFH10, .RUT, IWM
Position: N/A

Trendlines are one of the must-have technical tools on every serious discretionary trader's charts. As you learn to use them along with Fibonacci support/resistance levels, you'll probably find that you'll be more aggressive in taking the numerous trade setups that invariably appear near these critical areas of supply and demand. Here's an interesting technical take on the past two days of action in the March emini Russell 2000 contract. These kinds of setups occur on a regular basis, so if you learn to identify likely areas for a stock or futures contract to reverse and/or to follow through with a powerful move to the next support/resistance level, you'll be miles ahead of the average trader.

FIGURE 1: TFH10 EMINI. For those who love brute geometry, the combination of trendline and Fibonacci support/resistance dynamics can often prove to be a very powerful and profitable pastime.

Graphic provided by: TradeStation.

Figure 1 is the one-minute chart for the TFH10 (March 2010 emini Russell 2000, traded on the ICE). The index made a major cycle low at around 1525 Eastern time (ET) on Tuesday, March 9, 2010, and then this became the anchoring point for all of the ascending trendlines and the base for the Fibonacci measurements to follow. On Wednesday, March 10, 2010, prices charged higher right out the gate, gradually accelerating into a generally unsustainable angle of attack (see point 1) by about 1030 ET. I had already plotted the first three trendlines and was already short three contracts (at an average price of about 674.60) by 10:45 am, firmly convinced that the nearly 16% rise in the R2K since early February 2010 had reached its point of critical mass. I was pleased to see the second trendline fail at 11:35 and then became glued to the screen when trendline 3 gave way (see point 2 on chart) and subsequently took out the Fibonacci 24% support level a little after 11:50 ET.

The trendline/Fibonacci breakdown was powerful enough to drag prices close to the Fibonacci 38% level, after which a small countertrend rally helped create a fresh long-term uptrend line anchor point. That trendline anchor point didn't last too long, as the sharp breakdown at chart point 3 clearly depicts. The selling that ensued was ferocious enough to take the R2K a little south of the Fibonacci 62% support level in only 20 minutes. However, a new even longer-term trendline anchor point was formed at point 4 as the market staged a steady, two-hour-long meandering path back up toward the 675.00 area, forming another trendline anchor along the way.

Even in sharp selloffs, it's very common to see the Fibonacci 62% support level coincide with some sort of a relief rally, all else being equal, but remember this is a one-minute chart, and that a rally off of a 62% retracement on this short of a time frame has nowhere near the significance of a similar reversal off of a Fibonacci 62% support on a 15-, 30-, or 60-minute chart. Regardless, I bailed on my short contracts at 673.00 and called it a day.

At point 5 we see some more powerful trendline dynamics at work; you'll note that the long-term trendline was anchored in four separate reversal moves, making it a very significant support-resistance (S/R) barrier. Simply put, a pronounced break of the line was likely to be viewed by traders as a prime selling opportunity, especially since the previous relief rally had failed to approach the intraday high by a wide margin. Sure enough, the combined break of the trendline and the Fibonacci 38% support level quickly rewarded short-sellers with another point and a half move ($150 per contract), this time down to 671.80.

The main point of this article is this: Anytime you see a powerful trending move (on any time frame) accelerate to a parabolic and/or unsustainable rate of ascent (watch 10,000 charts for 30 years and you begin to develop an eye for such things), you can then monitor the stock (or futures contract or exchange traded fund) for subsequent trendlines and/or Fibonacci reversals or breakdowns. And when the trendlines under examination are in close proximity to key Fibonacci S/R levels (particularly the 38%, 50%, and 62% ones), strong breaks of both barriers will almost invariably lead to a powerful continuation thrust down to the next set of trendlines and/or Fibonacci S/R levels. Review the chart again, paying special attention to the price action at points 2, 4, and 5. Breakdown/continuation moves like this happen on an intraday basis all the time, and all you need to do is learn how to identify the patterns most likely to reward you with high-probability gains.

The best trading system in the world is the one that resides in the "three-pound universe" that's tucked inside your skull (yes, your brain). As you train it to identify high-probability continuation and/or reversal patterns based on trendlines and Fibonacci levels, it will surely reward you over time, depending on how seriously you apply yourself to the task.

Donald W. Pendergast, Jr.

Donald W. Pendergast is a financial markets consultant who offers specialized services to stock brokers and high net worth individuals who seek a better bottom line for their portfolios.

Title:	Writer, market consultant
Company:	Linear Trading Systems LLC
	Jacksonville, FL 32217
Phone # for sales:	904-239-9564
E-mail address:	lineartradingsys@gmail.com
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R2K Intraday Rally, Stall, Fall

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