Here’s The Edge When Trading A Reversal Pattern

March 21, 2003
Kevin Haggerty

The early first-hour
decline gave us the significant setup that we were waiting for in our trading
plan yesterday. I have included a chart in today’s commentary that outlines the
trade. The SPX declined to an 859 intraday low, retracing to the 240 EMA on your
five-minute chart, which is the same as the 20 EMA on a 60-minute chart. There
was a Kings & Queens reversal entry above 861.50 which carried up to an 879
intraday high, closing at 875.84. It was higher highs and lows on the run to
879. The first pause was at the .786 zone of 872, when the SPX backed off 5.2
points to 867.09. It then rose to 875, and then backed off to the 870.39 level
before hitting the 879 intraday high.

In addition to the
pullback to the 240 EMA, and then a reversal bar entry, what else made it a
significant trade opportunity? I had the following awareness levels in this zone
yesterday: 861.45 is the .50 retracement between 954.28 and 768.63, which is the
October low. Next I had 861.20 as the 1.27 Fib extension of the A-B leg up which
you will see on the chart I have included in today’s commentary. We also had
yesterday’s 1.0 volatility band of 860.50 in play. For those of you that have
learned about RSTs from my seminar or tapes, you also had an RST buy entry with
the 859 swing point low as your 5 point, then the other four points the previous
day.

Yesterday’s trade
emanated from a strong sequence of awareness levels, and that is what will
always give you an edge when trading a reversal pattern. FYI: For those of you
that are familiar with my five-minute chart setups which is usually an 8, 20, 60
and 260 EMA setup, this is not a change. Sometimes when the markets get captured
by news and are choppy, as now, I sometimes switch to the 5-period EMA from the
8-period EMA and use the 240 EMA instead of the 260 EMA, which is just the same
as a 20 EMA on a 65-minute chart, which makes it consistent on an hourly basis,
rather than the half-hour if you use a 60-minute chart. If you look at both
setups, there is hardly a difference, but it is just in my head, so use
either/or and you won’t find any difference in your trading.

They are pushing the
early futures up, as the Dow is +72 and the S&Ps +9 as I do this. That means
early on the major indices will trade right into a confluence of resistance for
you to be aware of in addition to the 870 – 875 head-and-shoulder neckline which
becomes a downside pivot. The awareness zones are 884, the .50 retracement to
the 1987 low, the 200-day SMA at 893, the 200 EMA at 912, and 900, which is a
natural square number. Incorporate today’s volatility bands with these levels.
Also, the big cap stocks have been trading in a great sequence with the
volatility bands, so those of you that take the volatility band service, be all
over these stocks.

Have a good trading day
and have a great weekend.