Trade setups week of 3/14

What needs to be explained about how I see trades is that I use the 3/10 macd as my seeing eye dog, which just helps me to pick up on the stability and direction of the short-term trend I'm attempting to trade.  Essentially it's just a tool that helps me to pick out mostly lower highs to enter short or higher lows to go long.  Something else that has helped me was to categorize where price is in the short-term trend by determining the 3/10macd criteria that is present at that time.  I wrote a blog post that introduces the concept here and laid out a spreadsheet regarding it here.
  The concept is simple; price follows a path of least resistance, and as such will often continue in the direction of the established trend (regardless of time frame).  So, you just need some context and a way to define trend for your objectives.  I use the 3/10 macd as a way to anticipate what price may do based on the pre-determined "trend".   So what I see on the 15-min 3/10 macd is a criteria (from the above linked spreadsheet) which matches a good probability setup.

Monday morning CSX short based on the 2c criteria and looking for a shortable pullback on the 5-min.

Later that day a long entry was taken based on the 3d criteria (highlighted on the 15-min chart in a rectangle):

Here was another 3d entry in ADM where the target was simply the PDL.  I have found that 3d setups typically occur as a short-covering phenomenon later in the afternoon which can run into the following morning, but it is critical to know where realistic resistance is and whether price is increasing to test resistance or if it has broken out of it (leading to more short-covering).

A 3a setup often provides good long entry opportunity, buy pullbacks on the 5-min:

A 1a setup can also provide good long entry opportunity.  Looking to buy a pullback with help from the 5-min 3/10 macd to anticipate that pullback:

Another 1a:

This one had great opportunity but lousy execution and I missed the re-entry :(

2c short in the SPY

4d short, was simply entering in a pullback of previous momentum

choppy

Crappy trades
Got short FCX before getting long.  Short entry was just above $118 and change, while the long entry was around $118 even.  My long target was the Open, but I got stopped out prematurely.

The 50% Fib. retracement of the latest impulse move held as resistance this morning.

Price has been riding the 20-day MA and still showing a bear flag.

Final Post...

 ...on the matter of the 3/10 MACD oscillator and how to effectively use it for intra-day trading.  Other posts on the subject can be referenced  HERE and HERE.   While previous posts dealt mostly with the construction of the indicator and price relationships used with it, this post will be a bit different.

If you are unfamiliar with this blog then you may also want to refer to the "Doc.s on Request" (sidebar to the right) for further 3/10 macd references.

What we know-
  There are two lines on the 3/10 macd; one indicates the difference between two moving averages (3- & 10-period), known as the "Fast Line" (also represented by the histogram) and one which indicates a moving average of that difference (a 16-period moving average of the 3- & 10-period differential) known as the "Slow Line".  Think of it this way:
Slow Line = an intermediate-term trend indication
Fast Line = short-term trend indication.
(as an aside; a Long-term trend indication can be a reasonably reliable Moving Average, like the 50-period, or a 20- & 50-period Moving Average that takes into account the orientation and slope of the two MA's (20- above 50-period and Up is bullish).
  So, the 3/10 MACD provides 2 layers of price; one which directly reflects price (the Fast Line),  and one which is slightly removed from price, being that it's a moving average of the difference between two moving averages (the Slow Line).
The above concepts are slightly less important than the one to follow regarding time frame layers.

Time Frame Layers:
  We learn early on that it is important to understand what higher time frames are doing if we intend to trade a lower time frame.  For the purpose of intraday trading we can not ignore the one chart which is likely studied upon, and made decisions off of the most in our line of work, the Daily chart.  We have to know where we stand in the daily time frame before all else.  In so doing, we should try to keep things simple.  Are we trending or within a range?  Where is likely support/resistance?  With those questions answered we can then approach our intraday analysis.
  My personal preference is for having a 15-min and 5-min chart as an Intermediate and Short-term indication of price.  Trades are taken off of the 5-min chart but only if the other two charts confirm my interpretation of price.  The way in which I like to set screens up is my own, most important is to use what you feel comfortable with.  That being said, my screen for the 3/10 MACD strategy is set up as follows:

   I use a 65-min chart simply because it divides into 390 evenly (the number of minutes in a trading day) and so we have each bar containing the same amount of data.  On this 65-min. chart I have two moving averages and the 3/10 macd set up so that they reflect the DAILY chart.  So, this 65-min chart shows me what it is the 20- & 50-Day moving averages are doing, as well as what the Daily 3/10 indicator is doing.  The other two charts (15-min & 5-min) only contain the 3/10 oscillator, reflective of their individual time frame.

How it works:
  First and foremost I want to know what the Daily chart is telling me.  Is the long-term trend (reasonably reliable Moving Averages) up, down or sideways?  Is the Intermediate-term trend (the Slow Line) up, down, or sideways?  Is the short-term trend (Fast Line) pointing up, down, or sideways?
I'm using the symbol APA simply because that is what opened up when starting my charting program.  So, I'll just stick with my original example from above.
  In the above example it is easy to see that the trend is Up.  We have both the 20- & 50-day Moving Averages sloping up and we have a green (Up) histogram with a slow line above the zero-line and sloping Up.
  Since continuation is more likely than change in trading, I only want to look for long entries when the Daily chart meets the above criteria (bullish Moving Average orientation, Slow & Fast Line above zero).  There are some nuances that will amend the previous sentence, but I'll get into more complex situations later.

Entries:
  OK, so we are bullish on APA because the daily meets the previously explained criteria.  Where do we enter?
  First, we want the Intermediate-term trend (in this case the 15-min chart) to tell us when price is starting to look bullish.  Second, the short-term trend will tell us when to enter (since this IS short-term trading) in anticipation of price continuing on it's already determined bullish course.

  Keep in mind; there are at least two approaches to this strategy; the aggressive (anticipatory) entries and the conservative (confirmed) entries.  Instinct and personal preference will dictate which you follow.  So in the above chart we have two highlighted up arrows on the 15-min chart to tell you when things are looking bullish in terms of the 3/10 oscillator.
Two signals:
  - Fast Line crosses the Slow Line
  - Fast Line crosses the zero-line (histogram changes from negative to positive or from red to green).

  Being that we have a strongly bullish Daily chart we may consider a more aggressive third signal:
  - Fast Line begins to move counter to the previous trend (in the chart above, the middle 15-min chart has an up arrow that is not highlighted.  This up arrow indicates where the 3/10 histogram began to "tick up" and move counter to the previous lower low readings one bar before the fast line crosses above the slow line.
   The reason for this discretionary third signal is due to the fact that the 5-min chart is showing a momentum buy divergence on a double-bottom, and if we can anticipate an early entry our Risk:Reward will be greatly maximized.

  Here's another example, using the SPY.  Again, the higher time frame was bullish (fast line above slow line and above zero), so it was a matter of waiting for the intermediate term to confirm and the traded time frame to signal an entry.

The 15-min chart indicated a bullish bias right at the open (actually showed a bullish divergence on the close of the previous day setting up a buy entry for the next bar) while the 5-min chart was a matter of waiting for the first pullback to enter.

 Now on to some less straightforward examples (though it makes a lot more sense to me to only search for and trade charts that show a straightforward bias ;)

Taking it to the next level
Context:
  Starting with the Daily chart helps to keep everything faster than a daily chart within context.  So, what are the two lines doing on our daily 3/10?  There are a combination of scenarios possible for our 3/10 MACD indicator, and each scenario tells us something about what price is doing (bare with me here):
 We can have the following scenarios:
1). A Positive Slow Line (above zero) trending higher, with:
  (a) a positive Fast Line ticking higher
  (b) a positive Fast line ticking lower
  (c) a negative Fast line ticking lower
  (d) a negative Fast Line ticking higher
2). A positive Slow Line trending Down, with the same set of criteria as above (a through d) for the Fast Line.
3). A negative Slow Line that is trending Up, while the Fast Line meets one of the above criteria (a through d).
  And, finally,
4). A negative Slow Line which is trending Down, while the Fast Line meets one of the aforementioned situations (a through d).
  In all, a total of 16-possible scenarios, and I intend on covering them all (there was a reason this was intended to be my last post on this subject).  I made this spreadsheet to reference (just request viewing permission) so you don't have to scroll back up.

1a.  Positive Slow Line trending Up with a Positive Fast Line ticking higher, like so:

This condition illustrates trend continuation or breakout moves which happen to be MOST dramatic when it is occurring in tandem with a Slow line crossing positive (as was the case in March '10, shown above more closely), they can also indicate short-term tops once the Fast Line begins to tick lower:

 
1b. Positive Slow Line trending higher, with the Fast line positive and ticking lower;  This happens a lot more frequently, and often indicates a mean regression of some sort, or a consolidation phase.  like so:

1c. Positive Slow Line trending Up, with the Fast line negative and ticking Down.
This isn't a frequent occurrence either.  For a similar reason as 1c, typically the Slow Line will be trending down.  Consolidation or pullbacks, but watch for breakouts/breakdowns.

1d. Slow Line positive and trending Up with the Fast Line Negative but trending Up, I don't really see this combination happening since when the fast line is negative trending up the Slow Line will typically be trending down.   So if you see it, you may be in a choppy range.

2a.  A positive Slow Line trending Down with a Positive Fast Line trending Up.  Typical of range expansion or continuation of trend.  Watch for a double top and/or divergence.

2b. A positive Slow Line trending Down with a Positive Fast Line trending Down.   Indicative of range or waning momentum, but watch for breakouts/breakdowns.

2c. A positive Slow Line trending Down with a Negative Fast Line trending Down.  Strong pullback of the previous trend that can lead to a bottoming move.  Look for reverse divergence.  If the slow line is dragged negative a lower high could start a bearish trend.

2d. A positive Slow Line trending Down with a Negative Fast Line trending Up.   Doesn't occur very often (on the daily timeframe), but often indicative of a pullback prior to a continuation of previous momentum. This will often set up criteria 4c where the slow line is dragged negative.  Can lead to the fast line resetting green and trapping shorts.
Notice on the last highlighted rectangle in Nov., price pulled back and moved for a continuation, but then squeezed longs in the morning star pattern that followed, so it technically didn't "work".

 3a. Negative Slow Line trending Up with a Positive Fast Line trending Up.  Could be a pullback of previous momentum, or test of Resistance? Could be a breakout move following a divergence if slow line is near zero. Should momentum carry the Slow line positive, the first pullback is a high expectancy setup long.

3b. Negative Slow Line trending Up with a positive Fast Line trending Down.  Usually highlights a consolidation pullback or test of Support.  Price can drift higher as the momentum wanes. 

3c. Negative Slow Line trending Up with a Negative Fast Line ticking Down.  Didn't find but a handful of these on the past two years of the SPY.  They almost always highlight a divergence or pullback after a momentum move.  Where is Support?

3d. Negative Slow Line trending Up with a Negative Fast Line trending Up.  Another infrequent occurrence (on the daily); infrequent because it's not long before the fast line crosses zero (histogram turns green) setting up a 3a.  If all we can do as a trader is "anticipate" a move then this is a valuable condition to be aware of. 

4a. A Negative Slow Line trending Down with a Positive Fast Line trending Up.  A pullback following an initial impulse move.  The histogram turning green is typically brief.

4b. A Negative Slow Line trending Down with a Positive Fast Line trending Down.  I would clump this one together with 4a. Watch for continuation of previous momentum.

4c. A Negative Slow Line trending Down with a Negative Fast Line trending Down.   Bearish trend continuation.  Trade in the direction of the trend.

4d. A Negative Slow Line trending Down with a Negative Fast Line trending Up.  Pullbacks. Consolidation. Know your range.

So, there you have it!  If we know the context of price we can have a clearer idea of what to anticipate.

Intraday Fib.s

I've put together a brief Google Document on using intraday Fibonacci retracements, with a focus on the 50% level.   Though it is brief, I'm expecting to add to it as time goes by, with more reference charts and notes.  The document is "private" but if you would like access just click on the linked image below and put in a request to view it and I'll open it up on an individual basis.

Monday SPY intraday

A look at the SPY for Monday 11.15
Price retraced 61.8% between the high of 11.11 and the low of Friday 11.12

  So, we gaped up this morning (upward momentum).  Drawing a Fib. retracement line off of the close on Friday and today's Open what do we see:

- Following the gap up momentum, price wicked the 50% retracement before returning to the Open.  NOTE: The above chart uses the closing time of 4:15 EST.  Using a closing time of 4EST  we get a nearly 100% retracement after the open and a 100% extension, the proportions of momentum and it's extension do not change).
- As price returned to the open the upward gap momentum carried us to a 50% extension.

The 15-min chart shows two strong bars early in the day (the green bar being a 2x-bar).  Notice the midpoint of these bars and their respective Support/Resistance qualities.

Using the squiggly line tool, we only really got one signal out of it today, that being a sell divergence (which would have been a test to sit through).

3/10 revisited

  ~ I have changed the original body of this blog post. ~


I thought I would go over this indicator once again with (hopefully) a clearer explanation and elaborate on some of it's subtleties.
Also, see this post.
The important stuff:
An indicator can be helpful in the sense that it is not subjective.  Where one may think they see a bull flag, an indicator pattern can help you pick up what the eye may not see.  However, it shouldn't be a replacement for individual price bars and paying attention to what they may be telling you in the context of the overall mood of the trading environment.
That being said, many useful conditions of the 3/10macd can help you to spot higher probability setups.
If you don't already know, the components of this indicator include a zero line (giving readings above as positive and below as negative), a Fast line (the fast line and the histogram are the same thing; it shows the difference between the 3- & 10-SMA) and a Slow line (16-period average of the difference between the 3- & 10-SMA's).

Start with the Daily:
 To keep it simple, you want to see what the 3/10 line (histogram, aka fast line) is doing.  Is it increasing or decreasing?

It's plain as day when the histogram is in a cycling mode, but can lead one into whipsaw when price displays more of a trend behavior.  Times like these it may just be easier to go with the question of whether the 3/10 is overall green or red (trending mode or corrective)?

Below, simply the fast line going up shows price moving up and the fast line moving down coinciding with price moving down:





There are some instances (a short squeeze environment in particular) where the 3/10macd fast line is not necessarily indicative of price direction.  Just because momentum (this IS a momentum oscillator) is decreasing does NOT mean price "should" be decreasing (in fact, the reason it may be going up is because short sellers keep getting stopped out).  So, context is critical.

Now, retaining the Daily chart's information, we can incorporate an intra-day time frame to give us a dual time frame context.

 In the 30-min chart below I included a macd histogram that depicts what is happening on the daily chart (top subgraph) while the lower subgraph indicates the regular 30-min 3/10macd.
We are looking at the location and slope of the slow line for a higher time frame direction bias while using the intra-day 3/10 macd as a timing mechanism, but don't forget to take the long-term trend (20- & 50- SMA's) into consideration.
So, in the chart below, the long-term trend (20- & 50-SMA's) is bearish, but the Intermediate trend (higher time frame 3/10macd) is clearly bullish ("bullish" only in the sense that the average smoothed price is increasing for the time being).  Being that the "long-term trend" is bearish we can consider a long entry as being "counter-trend" and, therefore, having a shorter holding period.

This is a bigger edit than I was anticipating.....I am going to leave the remainder of this blog post as it is, though it doesn't quite segue well with the information above.


Now what?:
Now you have a direction bias.  In this case, the bias is bullish, so one would look for setups that include (but are not limited to) bullish breakouts, pullbacks, fading lows.
Starting with the day in which our histogram went green (6/11) let's dial in to see if any signals were given.

This particular day was range-bound.  Following the (long-term) histogram change we got a bullish momentum divergence (on the traded time frame) right at an intra-day support level.

Now let's move to the following day which proved difficult for our bullish bias (as an aside; just because a bias is bullish doesn't mean price won't pull back, retrace, flash-crash, etc.) 
We got a late-day run-up in price (momentum) that carried over into this day (bullish so far).  Price didn't give up the gap and with our bullish bias we were looking to trade a pullback or breakout, which we got in the morning session.  It was at this point that price stalled.

OK, so what happens after momentum in price?  Pullbacks (and buyers looking to enter in pullbacks) happen after momentum in price.  We just never know how steep the pullback will extend (how interested buyers are).
A couple of things to look at:
Higher intra-day time frame told us momentum kept dropping as price advanced (bearish)

While our trading chart shows us more evidence of lagging prices

Just because we have a bullish bias doesn't mean we can't take a counter-trend trade, like perhaps a First Cross Sell signal (red vertical dash line) as long as we have realistic targets in mind.  Also being aware that towards the end of the day both intra-day time frames (5- & 15-min) were showing a bullish momentum divergence (and the next day happened to be a trend-day up, the type of day you need to completely ignore the 3/10 macd).
OK, let's take a look at the next few Bullish Bias days after the trend day up until the bias changed bearish:
Something worth noting; If your bias is bullish and your bullish setups aren't working so well and maybe you see better bearish setups, then price is telling you something.

So, to sum it all up; When using the 3/10 macd we're looking at it's:
Fast line Value - (the color of the histogram; Green = above zero line, Red = below zero line)
Slope - is the fast line (and/or the slow line) increasing or decreasing  in value?
Relation of the slow line to the fast line - is the slow line supporting or resisting the fast line?

Well that's all I have for now on this topic, hopefully it was a better explanation of the 3/10 macd than has been provided in the past.