XLE Looks Positive - Update 4

XLE Daily

Yesterday I said "If we close above the 8ema tomorrow, then it will look even more like a bobble between MA's." Well, we closed today above 8ema, and about half way up yesterday's candle. So now I expect we'll bobble between the 50sma, which is coincident with the downward Trend Line, and the 8ema, until we break out one way or the other.

If you look at this chart from the swing low at 68.66 forward, then you'll see the downward trending channel we're in, combined with the upward trending channel that precedes it, form a Flag pattern. The expected breakout from the downward channel is to the upside, which would continue the general uptrend you'd see on a higher Time Frame.

The fact that we bounced off the .382 Fibonacci also suggests we're going higher. But trading is a probabilistic enterprise, not a deterministic one, so we'll read the tea leaves the best we can, and remember risk control and capital preservation are the top priorities.

June AUD/USD Russian Doll Gartley Patterns

This is going to be a crazy trade. I was setting up the Gartley pattern on the AUD/USD 60 minute chart above and when I was finished, I noticed there's another smaller Gartley pattern inside the first.

The bigger Gartley, let's call it the 1 hour (1h) Gartley, is still establishing its C point. I was going to wait for the D point before entering a trade. But the smaller Gartley, let's call it the 15 minute (15m) Gartley, is establishing its D point. 

The 1h Gartley has white comments and green Fibonacci's. The 15m Gartley has yellow comments and yellow Fibonacci's.

So, we can enter the 15m Gartley, but instead of using the usual .618AD Target, we can go for a bigger Target of the 1h Gartley D point. However, I want to be conservative and trade each pattern separately.

I got 2 AUD June futures using mini-contracts because the risk is 85 pips. If I used 2 full contracts I'd be risking $1,700.

I bought the 2 futures at .7372. The Stop for both is just over the X,A point at .7457. The first Target is the .618AD of the 15m Gartley. Using the current D value of .73775, the Target is:

.73775-.618(.73775-.72555)=0.7302104

The second Target is the 78.6% Fibonacci of the 1h Gartley XA leg, which is .71797. Also, using the current C point, the calculated D point is:

.73775-(.7455-.72555)=.7178, which is amazingly close to the .71797 Fib.

We'll shade the second Target a bit because on the way there, we'll encounter the .7200 level, which is a round number. You might point out we'll also be encountering the .7300 level, but that's nowhere close to the Target. Also, there is some possible support from a gap down and swing low from late February. This adds to desire to shade the second Target up to the .7200 level.

Now, here's more craziness. There's a speaking engagement in Australia by RBA Govenor Lowe at 17:15 ET, while the FX market is closed between 17:00 - 18:00. So, come 18:00 this evening, we may get a gap open but there's no telling in which direction. I could have waited until after 18:00 to enter, but I decided I can handle the risk.

Bottom Line:

Trade 1

Enter: .7372

Stop: .7457

Target: .7304

Risk: .7372 -. 7457 = -85 pips.

Reward: .7372 - .7304 = 68 pips.

R:R : 68/85 = 1:0.8 This looks bad but remember the Gartley pattern has a 75% Win Rate, which means you could have a R:R of 1:0.3 and still break even. Plus we have the 1h Gartley that may pull down price further than usual.

Trade 2

Enter: .7372

Stop: .7457

Target: .7201

Risk: .7372 - .7304 = 68 pips.

Reward: .7372 - .7201 = 171 pips.

R:R = 171/68 = 1:2.5 which is great.

Time-frames of Choice

This applies to technical trading in "normal" market periods. A common question I hear, and ask it myself when learning a new pattern or other setup, is "what time-frames does this work best in?". This is a fair question and if you don't get a helpful answer, here are my thoughts about picking a time-frame in general.

Too long and you increase your risk of cycles unrelated to your pattern and headline news.

Too short and you increase your risk of market manipulation and large orders. Relatively large orders would look like headline news and be easier to occur due to lower volume in short time-frames. A larger time-frame can swallow up and absorb the relatively larger orders.

So, its reasonable to think there's a medium term sweet spot. For me, its somewhere between scalping and swing trading. Specifically, I try to stay within a range of 3 minute to daily charts. My favorite time-frames are 15 minutes and 1 hour. An exception is the grains market, i.e. corn, wheat, and soybeans. I prefer the Daily chart for the grains market.

Sometimes a setup is on a time-frame where the proper Stop placement represents too large a financial risk. If you can't get that down through mini-contracts, position sizing, or options, then go to a lower time-frame to find another good, but closer, Stop placement that gives you a smaller financial risk.

Whatever time-frame you choose, be cognizant of scheduled news, such as earnings reports for stocks and agricultural (crops and livestock) or inventory (energy) reports for related commodities. Unless you have inside information, you have to prepare for a surprise, which means taking a hedge or exiting your trade.