Here’s What Can Happen When We Get Confluence

  • March 12, 2003
  • Derrick Hobbs

The
indices hit critical reversal pattern completion levels mid session today,
and the reaction to that was a quick spike to the upside. Check out what I’m
looking at:

First the daily chart of
S&P 500 E-mini contract
(
ES03H |
Quote |
Chart |
News |
PowerRating). Today it
hit a large Fibonacci price support zone. At the same time it was doing this, it
completed a Bullish Butterfly pattern. Many of you have confused this with the
Gartley pattern that I’ve written a trading lesson about. This is a different
pattern. I will be following up with a trading lesson on this pattern soon.
Regardless, the pattern was there, the support was there, so what would have
told me to go long?


Below is the 30-minute chart of
ES03H. I am a big fan of candlesticks, and as this contract was completing the
pattern on the daily chart, the candles and price action began to tell the same
reversal story. As you can see there was:

  1. A double bottom

  2. Shadow/tailing candlesticks

  3. Bullish Engulfing Pattern.

With those three items on this
30-minute time frame mixed with the daily chart, it was a perfect trigger for a
long trade in my books.


Now, let’s shift gears to the
Dow Jones. Actually, the Dow Diamonds
(
DIA |
Quote |
Chart |
News |
PowerRating)
also completed a bullish butterfly pattern and began a reversal to the upside.
Below is a 60-minute chart that outlines this nicely. It looks like first
resistance for DIA comes in from 76.51-77.10.


Now, a nice way to play the Dow
Jones pattern if you’re not into ETFs but would like a stock would be
Merck
(
MRK |
Quote |
Chart |
News |
PowerRating). Not that it fundamentally
is a proxy (obviously), but the patterns are identical on the daily chart. Check
out the daily chart of Merck below. There are a few items that make this an
attractive long possibility:

  1. Bullish Butterfly Complete

  2. Fibonacci Support Zone

  3. Price Symmetry 10.6 point
    declines…very nice!

    a.     
    August 2002 — October 2002 = 10.65
    pt decline

    b.     
    November 2002 — March 11 2003 =
    10.58 pt decline

    c.     
    Nice doji candlestick yesterday with
    strong close today


If the current low holds the
first sign of resistance comes in from 83.80-55.19.

And the answer to

Monday’s quiz question is: 16
(Source: Arms Advisory, March 10, 2003)

Congratulations to Sebastian
M.!

 


Derrik Hobbs

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