KEWLTECH: Issue 065 – Compartmentalizing The Price Action

Technical trading is a skill.  It isn’t an inherent talent.  And like all skills, it can be learned and mastered.  One of the skills that you will need to gain is the ability to compartmentalized the price action so that you understand how the long time frames will relate to the short time frames.  The other day I heard a lot of static about CL, why it was selling.  I heard people talk about their fibs, talk about their ma’s and divergences.  But the simple explanation was far from all their mental meanderings.  And obviously, I wont mention the news hounds imaginings.  So many people make up all kinds of justifications for the drop and some are valid and justified.  But what was really annoying was, they used all kinds of indicators but failed to understand the simple.

Simply, we came up to resistance.

Wow really?  It was the previous support that was lost back in 08/08.  It was also a significant support back in 04/08, and so why wouldn’t it be significant resistance when we come up to it?  Support and Resistance?  That doesn’t make my screen like a NASA mission control screen.  Too vanilla.

But people don’t understand how to tie in their time frames.  They become so focused in on 1 time frame and 1 bias.  They also made their trading so complex by relying on their indicators that they simply forget about simple idea of support and resistance.  

It is a good idea then to learn how to tie in the time frames.  But one of the main complaints about doing that is their charts become inundated with lines galore.  You know like the sethian fibos on your charts with psychedelic  pretty colors and once in a while, when you wake up from your trance, you want to be able to move some of them so you can see the candles.  That is not how you want to work.

How To Start

Start from a high time frame.  And identify the S/Rs within the current price action context.  On this chart I will start with the weekly.  

What you will find is that when you change to a daily perspective, you will see these weekly lines line up to significant chart patterns.

Now what you have to understand is that you went from low detail to high detail.  In a weekly to daily, you will see 1 candle to 7 candles.  And you can discern different legs that make up certain candles.   But the transition from daily to weekly, is not nearly as detailed when you transition into weekly to 4hr.

Now what you have to ask your-self by this time, is what is relevant to you for the day’s activities.  I could have drawn a ton more lines but I didn’t.  The reason is, I want to make a decision about what the possible action the market will do over the next few hours or so.  What lines that I have now will be significant for the day.  Mind you these are the weekly lines.  As you can already see from the daily and 4hr, I can see some more lines that I can draw to make it more comprehensive.

I grayed out the weekly lines and added some 4hr lines.  I could go crazy and add more.  At this time I have not made any decisions about what the market is doing, just drew lines close to the current price action.

Even though I drew a ton of lines.  More lines than I usually do, just trying to make a point.  And when you understand what is necessary for you, you can do whatever you want.  But in this 30min view, you can see that what you drew works really well, see how the current candle is bouncing off the support that you drew?  Magic right?  Uh huh. 

Lets start thinking about what is going on.  So we can get a good picture what the market is trying to do.

We know that in the weekly, we drew down from a weekly resistance that was support from 2008.  So from the weekly perspective, we are currently trying to retrace up the leg that brought us down to the lows of 2009.  And we found support that was also support back in 9/08 before we lost it 9/29/08.  Does it mean we are done moving up?  No.  You are just respecting technicals.  

So what do you think is happening in a shorter time frame?

First thing you have to do is understand what has happened thus far.  So in this 4hr view you can see the leg up that took you to the highs.  That is significant because it tells you all the S/Rs it went through to get to where it got.  So if it was significant on the way up, it will be significant on the way down.

The next thing to note, is that we sold from the highs.  And this will give you your current local leg of interest.  Because it is the leg that is most immediate to the left of current price action.  If we break down and lose the support we are currently on (the green line), then the primary leg that brought us up to the high will be your leg of interest.  This is how you can compartmentalize the action in your mind.

So what has happened so far, is that we retraced up the big red candle on 4/12 9am est.  As we tried to reclaim the support we lost from that candle, on our first try up the leg that sold from the current high, we obviously will fail.  Basic technicals again.  And then we drew down to 107.8, which is the support we held from 4/1 – 4/6.  Wow, support before is now support again?  Very hard concept.  Need to be a rocket scientist to learn that.  But if you are a lowly brain surgeon, you may grasp this in a week or so.

Now until it breaks that support, your main focus will be the leg down.  And you will work on understanding how it is trying to go up.  So on this support we are on, 107.8, we will try to test the previous high at about 109.32.  What it has done so far is build up momentum, on the 30 you can see a little W.  It failed to gain the support is lost from that previous high on the first attempt and will bust through on this second attempt.

Now the overall progression on this leg up, the retrace done to 109.32ish is the first attempt and on this push up, it should go to the next level of resistance and then fail again on the support that brought you to the high of 110.22 back on 4/12.  So around 109.57ish.

These are the basics of trying to understand what the market will do.  When you prepare for the market by understanding what it is doing in this way, you can save your-self some confusion and pain.  (twiddling thumbs while waiting for market to do what it says it will do)   ho hum….blah blah blah.   

Finally!

This is part one on how to think the market through by compartmentalizing the price action.

The next steps will be to use your projections and help you define your time frames that you will work on.  Linking your time frames will help you understand the price action in proper context.