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Applying Fibonacci Cluster and Confluence Zones
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Applying Fibonacci Cluster and Confluence Zones

  #31 (permalink)
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Is there a way to factor in the case of increased volatility after the pullback begins in order to avoid situations where the price snaps back (faster) and resumes the previous trend after breaching the resistance/support (used as a confirmation of reversal)? I have been hit more often when I used those price range boundaries as confirmation for a reversal before getting in.

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Could you post an example (chart)?


Bamizo77 View Post
Is there a way to factor in the case of increased volatility after the pullback begins in order to avoid situations where the price snaps back (faster) and resumes the previous trend after breaching the resistance/support (used as a confirmation of reversal)? I have been hit more often when I used those price range boundaries as confirmation for a reversal before getting in.


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Fat Tails,

I just found this thread regarding your work on Fibs.. lots of great posts!

Are you familiar with www.eminiaddict.com? David Halsey trades off of fibs only. You might want to look at his system for a comparison.

Todd

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  #34 (permalink)
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Hi Todd,

I have come across this site, but I am not following it. Actually I use different types of support and resistance, includign Fib lines, pivots, VWAP, and ranges created by expansion bars. As an example I attach chart of ES for last Friday.

(1) First thing to notice: During the night session, price remained in the upper half of the trading range created by the last expansion bar of Thursday. Price also traded mostly above the main pivot PP and yesterday's midline. -> This is bullish. Probability for a breakout to the upside is higher than to the downside.

(2) The fib confluence line within the trading range was ignored (but the level had already correctly predicted the high of June 15). The next resistance level of 1117.50 (level that had already correctly predicted yesterday's high) was not reached, so Fib levels were pretty useless during this day.

(3) The weak upside breakout was stopped at May's volume weighted average price. -> Sellers stepped it at this level.

(4) From the monthly VWAP price moved down
-> first to yesterday's close
-> than to the main pivot PP, which acted as support throughout the day

Friday was a narrow range and inside day. For this type of day you cannot always use Fib confluence levels, but you would just have a look at pivots / yesterday's midline and ranges created by price action.



Todd View Post
Fat Tails,

I just found this thread regarding your work on Fibs.. lots of great posts!

Are you familiar with www.eminiaddict.com? David Halsey trades off of fibs only. You might want to look at his system for a comparison.

Todd


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Earlier in your fib thread, you mention various different kinds of bars - expansion bars, reversal bars, etc. but I don't know which bars are which looking at your chart. Do you normally use a 15 min chart to define these or do you also use other charts?

Can you post a chart and call out the various bar types?

Thanks,
Todd

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Hi Todd,

there is a thread here explaining reversal, inside and outside bars.

https://futures.io/journals-daily-charts-tape-reading/4183-three-set-ups.html#post45963

But I will give my personal definition for reversal bars.

Reversal Bar

A reversal bar is a bar with a small body and a long tale. To qualify as a reversal bar, it should close near the open and have an above average range. The long tail of the reversal bar shows that price has been rejected.

Railway

A railway a two bars that look like rails. A bullish railway would be an above average range bar that opens near the high and closes near the low, followed by a similar bar that opens near its low and closes near its high. A berish railway would be the opposite. If you think about it, you can transfer the railway to the timeframe x 2, and it becomes a reversal bar in that time frame.

Morning Star and Evening Star

A morning star is similar to a bullish railway but has a small body low range bar (doji) between them. The meaning is: bears are in control -> indecision -> bulls are in control now. An evening star is the opposite.

The interesting point is, if you transfer the morning or evening star to the timeframe x 3, it becomes a simple reversal bar.

Validity of reversal patterns

Not every reversal pattern will be followed through. The first problem is that a well chosen window of a trading range looks similar to a reversal pattern. So you may well look at a simple retracement in a bear, and if you choose the right section of this retracement, it looks like a reversal bar, before the bear continues its way down. So you need to qualify these patterns.

One way to qualify is to look for exhaustion or stopping volume. I would like to see a climax bar and/or a churn bar that confirms my idea of the reversal. A second way is to check where the reversal occured. Ideally I would want to see the tail to cut into some support or resistance zone.

Example

Let us have a look at the 15 min chart below ES (last Thursday and Friday) :

The chart use few indicators, floor pivots, ranges created by expansion bars and candle colours as follows:

white -> small body (doji) bar, means indecision
yellow -> reversal bar, means potential reversal, if other conditions are met
lime -> bullish expansion bar, means that the auction process shifted value upwards
red -> bearish expansion bar, means that the auction process shifted value downwards
hollow green -> upclose inside an established range
hollow red -> downclose inside an established range

On the second panel of the chart there is a better volume indicator. Breakout or climax bars are blue (high volume and large range), churn bars are yellow or orange (large volume per range), climax churn bars are magenta, low volume bars are white.

The following reversal or potential reversal are shown:

(1) Doji morning star: A valid pattern for several reasons.
-> occured just 1 tick above Thursday's pivot S 1 (not shown on the chart), and above fibonacci resistance, also made a higher low
-> the red downward bar is a climax bar (blue), the doji itself is a churn bar (yellow)

(2) Railway: A weak but valid pattern
-> occured just above the midrange of the night session range shown, and avove the main pivot PP
-> volume was weak during the night session, but the downward bar qualifies at climax bar

(3) Failed reversal bar
-> only reversal bar detected by the indicator (yellow body)
-> a climax churn bar (magenta)
-> but it is sitting in the middle of the trading range and not at its upper border, so it is a fake

(4) Railway: Stronger Pattern as (2) as the range is extended.
-> sits on the main pivot PP above resistance confirmed by the night session
-> downward bar is a climax bar

(5) False Railway: Not a clear pattern.
-> the second bar does not open near its high nor close near its low
-> no climax or churning
-> works anyhow, as it is a second entry just below yesterday's high

(6) Failed Morning Star: No bullish candle.
-> downward bar is not a climax bar
-> doji is not a churn bar
-> has two low volume bars, means lack of interest, market is going nowhere
-> the third candle does not close near its high, but has a small body
-> this is not a valid morning star

Because there were no valid reversal bars on the 15 min chart, the 60 min chart is examined.

(7) Railway
-> the railway sits nicely on the fibonacci line
-> pattern near the lower border of an upsloping trend channel
-> traps traders, as it is a false breakout (see turtle soup pattern)
-> better volume indicator cannot be used on a 60 min chart, because night session volume is non-representative for day session volume

(8) Failed and valid reversal bars
-> first falsee reversal bar (yellow body) hangs in the middle of the trading range, so it is just a section of a swing, nothing more
-> the valid reversal bar sits on the upper resistance line of the range, it is a false breakout and a failed test of yesterday's high

So in the end on the two charts there is just one valid reversal bar!

Attached Thumbnails
Applying Fibonacci Cluster and Confluence Zones-es-09-10-15-min-18_06_2010.jpg   Applying Fibonacci Cluster and Confluence Zones-es-09-10-60-min-18_06_2010.jpg  
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I'm getting caught up on some reading this week while in Hawaii and I got to chapter 4 of Miner's High Probability Trading Strategies and he tends to like reversals where you get Fib confluence in the context of an Elliott wave, for example, where a correctional wave's 100% retracement, relative to a previous correctional wave, meets the larger trend's 50 or 61% retracement level. I was looking at this on a daily ES and saw this. According to this it looks like this is a good place to short ES. However since we have already completed 5 waves of a down trend either the down trend is over and we will go sideways for a bit or go back to the upside, the current up-move being the 1st wave of a new trend or it might be the start of the 3rd wave considering the recent correction from the first move up.

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I am not a EW and Fib expert, so some may balk at my wave counts or use of Fibs, just putting up something according to my understanding of what I've learned.

Also, in HI you can trade the London open at 9pm! I haven't done it yet though as I'm having too much fun with the family, but still looking at charts and books.

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And the same price action from different angles

Hi shodson,

which of the chart below tells you the most compelling story?

Attached Thumbnails
Applying Fibonacci Cluster and Confluence Zones-weekly-chart.jpg   Applying Fibonacci Cluster and Confluence Zones-daily-chart-1.jpg   Applying Fibonacci Cluster and Confluence Zones-daily-chart-2.jpg   Applying Fibonacci Cluster and Confluence Zones-daily-chart-3.jpg   Applying Fibonacci Cluster and Confluence Zones-daily-chart-4.jpg   Applying Fibonacci Cluster and Confluence Zones-daily-chart-5.jpg  
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Fat Tails View Post
Hi shodson,

which of the chart below tells you the most compelling story?

I don't know, most if not all seem to point to higher prices ahead, but the EW looks like it may be coming to an end soon. Your impressive knowledge of market geometry and harmonics has my head spinning right now. I'm supposed to be on vacation man! I'm going back to playing Russian roulette auto-trading IBs

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I am not too much into harmonics or geometry. If you apply all that stuff simultaneously, it is a head-ache. Elliott Wave Theory is a method that allows at least four directions in price (up, down, circle, nowhere), so I never use it. However, I look at overlap, which means consolidation, and at wide ranging bars on high volume, which means that the consolidation is over. Volatility (range and swing size) is one of the most underestimated tools in technical analysis. Indicators are mostly useless. This is particularly true for oscillators. They are just distorting price.

MY preferred chart is the last one, with the Keltner Channels, a moving average and a regression line. If the regression line is below the moving average it indicates that the bears are still strong. So price could retrace back down to some extent.

My second preferred chart is the one with the Gartely pattern. Just means that the bulls could not move back in two swings to where the bears started their raid. Who is in control?

The Fibonacci stuff is just needed to follow the swing sizes, but I would not enter any position based on Fib lines. If you look into the book of Miner, he combines Fib lines with momentum strategies. I would further add volume analysis. As a package, momentum + fib + volume it works. Miner's book is a good one, I enjoyed reading it.

If I use fib lines at all, I take my secret weapon, the confluence indicator (shown below). The right chart is not for trading, just to explain, how this indicator is working.



shodson View Post
I don't know, most if not all seem to point to higher prices ahead, but the EW looks like it may be coming to an end soon. Your impressive knowledge of market geometry and harmonics has my head spinning right now. I'm supposed to be on vacation man! I'm going back to playing Russian roulette auto-trading IBs


Attached Thumbnails
Applying Fibonacci Cluster and Confluence Zones-sp500-daily-25_02_2010-27_07_2010.jpg   Applying Fibonacci Cluster and Confluence Zones-sp500-daily-25_02_2010-27_07_2010-details.jpg  

Last edited by Fat Tails; July 28th, 2010 at 05:33 AM.
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