Valleys and Mountains are prevalent in charts. There is an old adage in the trading world where people are told not to pick tops and bottoms. Most people pick tops and bottoms out of shear speculation. What is speculation to begin with. Lets do a little dawgma.
SpeculateMerriam-Webster.com Definition
a : to meditate on or ponder a subject : reflect
b : to review something idly or casually and often inconclusively
Speculation is often inconclusive. Just like Cramer can speculate that the market is very resilient and would be hard for it to sell off. You can say by the results he got the following day that his thoughts were inconclusive. The market has so far dropped 92 pts since he declared what he declared. Now in Cramer’s defense, he isn’t a technician.
To think that speculative analysis is factual is like buying the Brooklyn bridge from me. The other day, there was this maroon in chat, scolding all of us who shorted the market. Saying that we are contributing to the death of the economy. And even said that the locals and paper traders were doing a disservice to America. He thinks the trend is a lie and he trades the news. Obviously, he can’t read a chart. And his way of thinking is not far from most speculators in the market. It is also the false thinking that the politicians will lead you to believe that the small retail traders are causing the market to tank. Retail is not the majority in the market. Retail does not have the influence as the large banks and institutions that make up the group we know as market makers do. What is more american than survival of the fittest and free enterprise?
Why have we gone off in this tangent? Because when people pick tops and bottoms, it is not based on facts. The use of technical analysis by evaluating the support and resistance with momentum can get you from conjecture to substantiated answers.
Now back to picking tops and bottoms. It is harder to pick tops and bottoms where there has been no retracements but not impossible. You can determine levels of interest through the use of fib extensions and you can determine how it will hit those lines by noting the fading momentum. This method is great when you make pristine new highs or pristine new lows. But when we are talking about retracements it is easier to pick tops and bottoms. Why? Because you can look left.
Where do peaks and valleys form in retracements?
All failures on the way up always fails at previous support lost of a previous peak.
All valleys generally form from the support just above a previous valley or a significant support from the leg up.
What you have to understand is that failure is always stronger at the leg start (up/down). Generally, in order for you to move up toward previous peaks, much of the bottom and sometime the middle is already set up for for 1st touch in the process of accumulation.
And for moving down you get stronger areas of support at the bottom of the leg, because distribution is wipes out a lot of the top and middle levels of support 1st touches.
Why then is the support or resistance stronger at the start of the leg? Because of their proximity to the actual leg start. It will always be the first touch.
Why is this little bit of information valuable?
1st touch scenarios always produces a strong repulsion of the price action. This is especially true if the level is an old level. Meaning it has a long history. Many people see the peaks or valleys as price moves closer, the scalper forgets these relationships and lose out on many significant pull backs.
Many times these pull backs are so significant they see their profits dwindle to negative. Part of the reason they allowed such a thing happen is because they failed to see the distribution setup in the lower time frames. They only want to play the 2nd touch goal of passing the level. The bias makes them forget.
Now in the first chart 1600tk, you want to look at A. “A” is this mornings attempt to climb up to 66. What is in the way of this move up to 66, was 3 and 4. The peaks at 3 and 4 was posing a strong resistance to the move up. Now when we look at the 133tk chart, you will see how the distribution (red in macd) line as the price moved sideways and toppy.
Effectively, the distribution started at 8:30am. As we get higher highs on lower macd, we can qualify the distribution. And we can also qualify all of the valleys till A as 1st touch scenarios. Where do we finally fail? At the first level of support lost from the high at 3 which is also denoted by high at 4. We peaked. Then we get the flush. Where does the price action bottom end? The support we failed to lose, first level of support reclaimed on the move up, from the low at 8:15 am est which is denoted by the low at 8:42 am est. Now from this perspective, can you say the move, which was setting up a long time, was random? Can you also conclude that the level where support was found was random as well? We form the valley. Now take some time to note in whatever chart you choose, where most of the peaks and valleys formed in whatever equity or indice you want. When you find those tops and bottoms, examine the momentum. Did they setup for the fade/pop?
You should note that peaks and valleys do form at support or lost support from the leg or from previous peaks and valleys. Yeah its a generalization. But, when you are scalping, it becomes invaluable when you are breaking out from consolidation, you can then determine where it will stop.
Here is a different looking chart. This chart is a 1000 carr volume chart. Volume charts are much cleaner than timed charts and some people prefer them over tick charts.
Some would be shocked by what I’m implying. That markets do not move randomly but they actually adhere to some technical rules. Some people think that even price levels are random. Some people even say that “false breakouts” are random. Is it possible their chart reading skills are lacking? No clue how to read momentum? No clue how markets really move? That is why they make such wild speculation.
Another reason why people fail to see these “false” breakouts? They don’t know how to use time frames. They only use 1 or 2 time frames. They don’t really understand that change happens in the lower time frames. If they did, they will not be caught on the wrong side of these “false” breakouts. Prior to the drop described above, there was a guy who tweeted the following. “The momentum is bullish!” Price then drops 7pts. He had a Cramer moment. Why did he call the bullish momentum? Because he was looking at a 30min chart ONLY! Quel maroon!
Peaks and Valleys or Tops and Bottoms are technically consistent. They adhere to the rules of support and resistance. By that 1600 tk break down, it is unclear how the market popped back up so quickly. But when you look at the 133tk, you will see how the levels were tested on the way down and recognize the accumulation started long before it dropped. Thereby qualifying the peaks on the way down as first touches. And knocking out the significant levels in the process. Random moves?
So to simplify, you will peak or valley at levels during first touch. You will see many peaks and valleys form during the process of accumulation and distribution. Do peaks and valleys serve a purpose? Yes! They not only highlight significant levels, but during process of distribution or accumulation, they set up larger moves to bring you further down or up a leg. How will you see how momentum will help form at these first stops? You look at the momentum and price action of the lower time frame.
Thanks FMM for helping me write goodly English.