Feb Gold May Flutter South

At 3:28pm ET I sent this Tweet:

"Entered limit order to short Feb Gold from 1830 due to a possible bearish Butterfly pattern. Stop 1847, initial Target 1806."

See the hourly chart above for the bearish Butterfly pattern. The D point hasn't yet established itself, but the expected level is the 127.2% Fibonacci extension, which is at 1830.44.

The limit order was filled at 1830, which I shaded a little from 1830.44 to account for slippage. I set the Stop at about 5 points over the 161.8% Fibonacci extension, which is 1847. The Target is the 61.8% Fib retracement of the AD range of the Butterfly. Until we know what the actual D point is, we can't calculate the Target. But we can use an initial guess based on today's high, which is 1831.40. Based on that, the estimated Target is:

1831.40 - .618(1831.40-1789.10) = 1805.2586 ~ 1805.30

That would give us an estimated Risk:Reward of:

Risk: Stop - Entry = 1847 - 1830 = 17

Reward: Entry - Target = 1830 - 1805.30 = 24.7

R:R = 24.7/17 = 1.5:1, which is not great but its acceptable for a proven pattern like the Butterfly.

It would be very typical if price rises higher before establishing the D point. If that happens, we'll need to adjust the Target, but not the Stop because the Stop is based on the 161.8% Fib extension of the XA range (1821.60 - 1789.10), which is independent of the D point.

Summary:

Entry: 1830

Stop: 1847

Target (with estimated D point): 1805.30

R:R 1.5:1

Paypal may be a friend again - Update 10

We've been just chopping around in a consolidation. We're still above the 2 Fibonacci levels that have been providing support for weeks.

There has been no news and won't be any real news until we either break out of this consolidation to the upside, as I expect we will, or to the downside.

March Wheat did an about-face - Update 2

We had a gorgeous day for our short position, even though we had relatively low volume due to it being New Year's Eve day. We closed with a lower high and a lower low than yesterday. We also closed under the previous Support/Resistance level that provided support for the past 2 candles, but not today.

And Stochastics are still in the mid-range while the BB/KC Squeeze is about to break out. Things are looking very constructive as of today's Close.

Corn also closed with bearish indications, which lends some indirect support to a short position in Wheat.

There are only 2 grain related USDA reports due out next week. They are both at 3pm ET on Monday 1/3/2022:

• Fats & Oils: Oilseed Crushings, Production, Consumption and Stocks
• Grain Crushings and Co-Products Production

I'm told by respected Ag trader Richard Anderson that usually neither are market moving reports. So, I'll be holding our position through the news release. You can see the schedule here:

https://www.usda.gov/media/agency-reports?start_date=1%2F3%2F2022&end_date=01%2F07%2F2022

If you noticed in yesterday's post I was also short Soybeans, I covered that position at the close today at 1340. Net is 1364 1/2 - 1340 = 24 1/5 points * $10/pt = $245 in the Soybean trade. The full contract would have been 24.5 * $50/pt = $1,225.

I closed it because:

• I'm over-weighted short grains to hold over the weekend.
• March Soybeans could not close below the 8ema yesterday or today.
• Taking the profit is a hedge against Wheat gapping up at the next market open.

Nothing to do now but wait until next year :)

March Wheat did an about-face - Update 1

We got a nice confirmation of our short thesis on the zoomed in Daily chart above. If you want to see a wider view, look at yesterday's post.

We had a little gap up at the open then formed a Bearish Engulfing candlestick pattern. Stochastics are not yet oversold, but we didn't make a lower low compared to yesterday, and the BB/KC hasn't broken out yet.

We also got some encouragement from the Corn and Soybean daily charts. (I'm also short March Soybeans as of yesterday from 1364 1/2, but I'm not blogging about it because I got in way too early.)

Our short is looking good and I held the position, but I'm not feeling confident yet. It doesn't help that tomorrow is New Year's Eve day, which makes things a little weird, including possible tax related sales by traders and expected light volume.

March Wheat did an about-face

Above is today's Daily chart of March Wheat futures right after the grains market closed. Just before the Close I shorted a YW mini-Futures contract at 790. The mini-contract is $10/pt, while the full size contract is $50/pt.

In the previous Wheat trade on this blog I wanted to go long due to a Gartley pattern. That Bullish pattern has not yet been violated, so this is a bit of a contradictory situation. However, my Target for this Bearish trade is above the X point of the Gartley pattern, so both trades can work.

Here is what I saw that caused me to go short today right before the market Close:

• Head & Shoulders
• Bearish engulfing candlestick pattern
• Continuation by the next candle
• Close below the 8ema, 20sma, and 50sma
• Close below the H&S Neckline
• Possible Bollinger Band/Keltner Channel Squeeze
• Possible AB/CD (light blue angled lines)

However, I also see we had support from a previous Support/Resistance level, and we formed a Bullish Harami candlestick pattern. Today we formed a Doji candle which represents indecision.

We could turn right around and head back up from here to hit the Gartley .618AD Target, and we haven't yet confirmed an AB/CD by dropping lower than the B point at about 750.

So, I don't have a lot of confidence in this Bearish trade yet, but there are enough indications where it makes sense to enter the trade, albeit lightly.

I set the Stop at 801. I picked 801 rather than 800 because 800 is a round number. It's just above the H&S Neckline, 8ema, 20sma, and 50sma. It's a bit of a tight Stop, but this is not yet a high probability setup. And if we break through all that resistance, then the downward momentum that got us where we are can't be very strong. So stopping out early might be a good thing.

I set the Target near the 727.643 78.6% Fibonacci level of the yellow range, which coincides with the 200sma, the measured move of the white AB/CD, and shades the light blue AB/CD and the full measured move of the Head & Shoulders.

Summary:

Entered: 790

Stop: 801

Target: 729

Risk: 801 - 790 = 11 points

Reward: 790 - 729 = 61 points

R:R = 61/11 = 1:5.5 which is ridiculously good.

Wheat Marching to a Reversal - Exit

Above is Yesterday's  March Wheat futures Daily chart. Yesterday, 12/22/21 at 8:47am ET, I Tweeted:

"Well, the Mar Wheat Futures setup is finally ready to trade, but the Risk:Reward is bad. So, have to pass :("

Sometimes being diligent will cost you entry to a trade. There's an old saying I like "I'd rather be out wishing I was in, than in and wishing I was out".

If I waited for confirmation and then entered, it probably would have been around 805. If I did, I would have set the Stop to 750, just below the D point at 751. The Target would be 827, which is the 61.8% Fibonacci based on a Gartley pattern with the D point at 751. You can see the targets listed on the chart.

The Risk:Reward would have been:

Risk: Entry - Stop = 805 - 750 = 55

Reward: Target - Entry = 827 - 805 = 22

R:R = 2.5:1 which is the opposite of what you want, and way to bad to trade. In addition, A risk of 55 on a mini-contract of $10/pt would be $550, which is a little too high.

So, unfortunately, I'm sitting this trade out and keeping my capital dry for the next trade.

Paypal may be a friend again - Update 9

More chop, but today its in our favor. We closed over the 8ema and above the 161.8% Fibonacci of the green range. We also closed at the top of today's candle.  The ADX crossed again, but at this point its useless because it keeps crossing back and forth in this chop.

It'll take 2 or 3 trading days of green candles to know if we're breaking out of this congestion. So, we're holding our bullish position and keeping our eyes open.

Wheat Marching to a Reversal - Update 1

The previous post showed we were waiting for price to get down to 740 for a long entry. We got down as low as 751, so our order never triggered.

Now, we had a bullish looking day today. We closed over the 8ema, 34ema, and 50sma. We closed over the Head and Shoulders neckline, and closed at the top of the candle. You could also argue we formed a double doji sandwich candlestick pattern, which is bullish. Also, 3 trading days ago we bounced off the 61.8% Fibonacci retracement in the yellow range. However, we haven't yet closed over the 20sma, or even penetrated it.

Do we abandon our thesis that price is coming down to the 740 area because of all the bullish indications above? I'd say not yet. I'd like to see confirmation in the form of a close over the 20sma with Stochastics not in the overbought condition. If we get this tomorrow, then we'd have to conclude we reversed the recent down trend and have entered an up leg, which would rejoin the longer term up trend.

Paypal may be a friend again - Update 8

The S&P 500, Dow Jones Industrials, Nasdaq, Russell 2000, NYSE Composite Index, Dow Jones Transportation Index, equity indexes, and probably more, all closed down over 1% today.

Look at Paypal's daily chart above. We got a Doji! That's an obvious case of relative strength. So, even though we closed 2 trading day's in a row under the 8ema, we're still in the trading range and showing outstanding relative strength, which leads me to decide to hold our position.

Paypal may be a friend again - Update 7

The last sentence of yesterday's post was "We'll want a higher high and higher low again, but what we really want is to close near the high of the day.". Well, we didn't get a higher or a higher low, but we did close near the high of the day.

We're still higher than the recent swing low at 179.15, above the 161.8% Fibonacci extension of the yellow range, and very close to the 8ema.

So, it wasn't a constructive day but it didn't break our conviction in this trade either. We're kind of chopping around down here. My expectation is that we're building a bottom from which to go much higher. But technically we're a bit at risk of heading lower.

Paypal may be a friend again - Update 6

Today's red candle looks bad but what we see is actually still bullish. Yesterday we closed above the 8ema and the 20sma. Today we gapped up at the opening. If Stochastics were overbought, then a gap up could be an "Exhaustion Gap", and that could be bearish. But Stochastics are in the mid-range, so a gap up is bullish.

We did retrace back down to close the gap, but like I explained in a previous post in this thread, that will relieve us of any "Gap Pressure". So, it can be a good thing. Of course, we can continue down and hit our Stop, but we don't need to worry about that today.

Notice the ADX DI+ crossed back up over the DI-. That's a bullish sign. And we didn't close below the 8ema or 20sma. In fact, today's Close is sitting right on them. This could be seen as support. Which would imply we'll head back up tomorrow.

Also, notice yesterday's candle made a higher low and a higher high than the day before. And we did the same thing today. This is bullish for continuing our uptrend.

Tomorrow could be an important day for our price action. We'll want a higher high and higher low again, but what we really want is to close near the high of the day.

Wheat Marching to a Reversal

The Wheat March Daily chart above looks very busy but its a really cool setup and I'll explain the whole thing. I'll explain the different elements of the setup then pull everything together at the end.

Let's start on the left and work our way right. The big, thick, white, angled, lines represent an AB/CD pattern. The calculated top of the pattern is 856.75 (see calculation on the chart), but the actual top was 874.75. This range is also shown by the large, vertical, green, downward pointing arrow.

The anticipated retracement of the green range is 50%,  61.8% or 78.6%. The box with green text on the chart has the calculations. 50% is 750.75, and 61.8% is 721.5%. Yesterday's candle low was 751, which is only a quarter point shy. You could certainly argue today's bounce was a rejection off the 50% Fib of the green range. If we say we hit the 50% Fibonacci of the green range, and price goes lower, then the next expected move is to the 61.8% Fib.

The yellow range is a possible Gartley (aka XABCD) pattern setting up. The X, A, B, and C points are labeled in white. The D point hasn't been determined yet. The shorter, thick, white, angled, lines represent the AB/CD pattern within the Gartley, and the bottom end of the line on the right is the calculated D point. You can see the calculation in the box with white text. The result is 730.5.

The candle low yesterday and today is finding support at the 61.8% Fib of the yellow range, which is 759. You could certainly argue today's bounce was a rejection off the 61.8% Fib of the yellow range. If we say we hit the 61.8% Fibonacci of the yellow range, and price goes lower, then the next expected move is to the 78.6% Fib.

The purple lines represent a Head & Shoulders pattern. You can see the traditional measured move by the purple vertical line dropping down from the neckline. But, in my experience, the better target is half the measured move. That's represented on the chart with a thin, purple, horizontal line at about 739.

The white, thick, rising, squiggly line near the bottom is the 200sma. It's currently about 721. It's rising at a rate such that it'll easily surpass 721.5 by the time price comes down to it, if price drops that far before reversing. I mention 721.5 because that's the 61.8% retracement of the green range, which is the lowest target.

Stochastics are in the bottom panel of the chart and are only barely in the oversold zone. This tells me it would not be surprising to see lower price from here.

OK, I think we hit all the elements of the chart that warrant consideration. Now I want to tie everything together. Basically, I think we're going a little lower then reversing and heading back up. Here's why:

• The large AB/CD has an expected target of 61.8% Fibonacci retracement of the green range, which is 721.5.
• The AB/CD of the Gartley pattern has an expected target of 730.5.
• There's expected support at the 78.6% Fibonacci level of the yellow range at 727.643.
• The Head & Shoulders has an expected target of 739.
• There is expected support at the 200sma, which is currently 721 and rising.

The highest of these possible bottoms of the current down leg is 739, and the lowest is 721.5. To be conservative, I want to enter a Long position at 740, which shades the 739 level by a point to account for slippage from the Bid/Ask spread and imperfect patterns.

The proper location for a Stop on the Gartley would be just under the X point, which is 687.75. However, even with the mini-wheat futures contract at $10/pt, the risk is a little too high. The risk would be 740 - 687 = 53 points * $10/pt = $530.

To reduce the risk amount, I think we can place the Stop 710. This gives us over a 10 point cushion from the lowest expected reversal point of 721.5. The amount of the risk with this Stop would be 740 - 710 = 30 * $10/pt = $300, which is a more tolerable number.

Using the Gartley pattern to determine a Target, gives us 819.65. This is .618AD, where D is the value at AB=CD, which is 730.5. We'll have to adjust the Target when we have an actual Gartley D point.

So, bottom line is, I entered a conditional order this afternoon to buy a March Wheat mini-contract (YW) with a limit of 740, Stop 710, and Target 818. (818 shades the 819.65 exact Target to account for slippage).

Risk: 740 - 710 = 30 * $10/pt = $300

Reward: 818 - 740 = 78 * $10/pt = $780

R:R = 780/300 = 2.6:1 which is excellent. Especially when considering the Gartley has about a 75% win rate.

Paypal may be a friend again - Update 5

Every equity index was down at the 16:00 ET close today. If you average out the percentages its about .5% down. Meanwhile Paypal closed about .5% up. That's Bullish relative strength.

We're still under the 8ema, and every other Moving Average on the Daily chart above, so we're not out of the woods yet. We didn't form a candlestick pattern but we did make a green candle and closed over the 161.8% Fibonacci extension on both the green and yellow ranges.

If we continue upward from here, we'll be making a higher low, which is Bullish. We could even form a Bullish Inverted Head and Shoulders pattern, but I'm getting ahead of myself.

For now, I think the best decision is to hold our Bullish position.

Paypal may be a friend again - Update 4

On today's Daily chart at the top, you can see we're still above the Butterfly D3 point, still above the 161.8% Fibonacci extensions of both the green and yellow ranges (see previous posts for a wider view of the Daily chart where you can see the ranges), formed a Doji candle which represents indecision, and closed very close to the 8ema. These are indications the current down leg has insignificant momentum.

On the Daily chart on the bottom, we zoom in to show that we closed the Gap. Now that the Gap is closed, we no longer have what I like to call "Gap Pressure", which means there's an attraction to price to reverse and fill in a gap. So now, with the gap filled, price is free to resume the uptrend.

The expectation from here is to reverse direction, go up and penetrate the 20sma (thick green curvy line). and continue up to fill the next gap, which is from 226.25 (11/8/21) - 215.97 (11/16/21). We'll probably get a temporary rejection and drop after filling that gap because in addition to the gap is the 50sma, which is currently in the gap (thick red curvy line).

After that, we can continue upward to our target of 260, which is the .618AD3 retracement.

Stocks of Interest - Criteria

 For me to be interested in trading a particular stock, I'd look to meet the following criteria:

• Traded on a USA exchange.
• Not pink sheets or Over-the-counter.
• Minimum 200,000 shares traded on a daily basis. The higher the better.
• Either options or the stock must have a reasonable Bid/Ask spread.
• Share price over $5.
• Infrequent gaps.
• Over 200 days of trading history.
• Next quarterly earnings report at least 10 days away.
• Optional: Longs are over the 50 DMA (Daily Simple Moving Average) and shorts are under the 50 DMA.
• Optional: -1 > Beta < 1. The closer to 0 the better.

Paypal may be a friend again - Update 3

The daily chart above looks weak. We bounced off the 20sma, closed below the 8ema, and the ADX crossed back to a negative condition. Bearishness.

However, we just closed the gap from 12/6/21 - 12/7/21. We never went lower than the 161.8% extension of the green range. Stochastics are not overbought. And, while we did close under the 8ema, we closed very near it. Also, we haven't seen confirmation that we're going lower by the next candle, which of course is because it hasn't formed yet lol.

Given the above, its a difficult call to make, whether to hold or exit. Some doubt is introduced by suspecting I'm just avoiding taking a loss, which is a real psychological bias traders have to fight. But being a Friday, and having only a small amount of potential loss, I decided to hold the position because we wouldn't want to miss a gap up and run to the upside on Monday when we don't have a convincing case today either way.

It may seem ridiculous to do this analysis and struggle with a decision when there is so little capital at risk on this trade. But there are two things you need to consider. One is I may be documenting my trades with only a proportional fraction of my actual position. But more importantly, good trading is far more about process than outcome. There isn't anyone in the world who is saying their trading methodology has a 100% win rate. So occasional, or even frequent, losses are guaranteed, even with the best trading system you can find.

Becoming a profitable trader is about finding a system that has a positive expectancy and having the discipline to follow the rules of that system on every single trade. Making or losing money on any one trade doesn't matter. What matters is proving your system has an edge, and continually improving your execution. Follow a proven system and you'll make money over time. Process over outcome.

So, no matter how much or how little I have at risk, I analyze every trade with equal conscientiousness. Or at least that's my goal.

Paypal may be a friend again - Update 2

Nothing changed for our bullish position today. It looks like we got a Bearish Harami candlestick pattern, but yesterday's Open was 191.95 and today's Close was 191.75, so that's not a valid pattern. Also, we closed over the 8ema.

I think we just gave some respect to the 20sma but as of today's trading, its inconsequential. So, we held our position.

Tomorrow morning at 8:30am ET we get the monthly US CPI (Consumer Price Index) report. That's rated as a High Impact report and will likely move the markets one way or another, if its not close to the expected number, which is .7% for CPI and .5% for Core CPI. 

I considered getting a hedge or even exiting the position today, before the report comes out, but decided not to because of 2 reasons:

I think its very likely to be higher than expected. If so, I'd expect that to be bullish for PYPL because in inflationary times, consumers spend their money faster since their purchasing power is eroding quickly. And it seems very unlikely we'll get a low inflation number.

If the report comes out as expected, then it will have no effect on stocks and we can follow our Technical Analysis, which says its not yet time to sell.

Paypal may be a friend again - Update 1

Above is a Daily chart of how we closed the day. Notice we closed above the 20sma (thick, green, curvy line). We haven't cleared it very much, and tomorrow we could reverse, but for now its looking good. We also got our ADX bullish cross and Stochastics are still low.

Given these things, and the discussion in my previous post, we're on our way to a nice trade. You can see the targets in the comment box on the chart. Our target is the .618AD3 retracement at 260.11.

Paypal may be a friend again

After a lengthy sell-off, Paypal (PYPL) may have turned the corner. The daily chart above shows how a perfectly formed Gartley pattern turned into a Butterfly. We're bouncing off the 161.8% Fibonacci extension on both the green and yellow ranges. The previous 2 candles show a Doji Gap Up candlestick pattern and a close over the 8ema. Today we see a continuation of an up swing, but the day's only half over. It also looks like the ADX DI+ is crossing over the DI-. And Stochastics is still low. All this is Bullish.

However, price is currently up against the 20sma on the Daily chart. It could easily reject off this level and head back down. So this is a critical inflection point. It'll be important to see if we cut through the 20sma and continue upward, or make new lows.

I took a flyer (high risk trade) on PYPL and got a Jan 220/230 Call spread on 11/30/21 for $0.63. It currently (12/8/21 12:53 ET) has a Bid/Ask spread of 1.08/1.18. I'll be looking to add to this position if we continue on a good trajectory.