NIFTY TECHNICAL OUTLOOK -12Nov2011 (Weekend Analysis)

• Towards upside 200 DMA would be the resistance and a turnaround in long term trend along hesitancy of bulls would alter once this will get passed upside. The respective value for this comes around 5391.  
• The  medium term moving average of 50 DMA at 5058 would  be the immediate  support  for index.  
• Any major downside can drag index towards 4720 levels would be the decisive support and any fall below those would ask for a major downside. But probabilities as of now are very low for such a fall since those levels had already proven its credibility twice before the recent leap toward 5400 levels.  
• Earlier 5170 levels had earlier acted as a stiff resistance and bulls had breached those levels in  the previous day’s trade. Anyhow that breakout was not much utilized by bulls and now again  reached below that resistance.  
• A trendline plotted by joining significant few lower bottoms would provide resistance around  5480 levels.  
• ADX indicator which indicates the strength of the trend regardless of the direction is descending downside after few days of consolidation and this is indicating that the ongoing trend is without enough strength or direction hence a turnaround in a trend towards any of the either direction could happen soon.   
• MACD oscillator which was on going with a positive  crossing for the past many trading sessions is supposed to give a negative crossing over its respective average indicating the fading positive trend. In this indicator sell signals are triggered when MACD line crosses below the nine-day EMA of the MACD.  
• A long term channel which was breached both upside and downside had now reached back into action. Index last week had approaches the lower channel band which is a resistance. A  breaching of this resistance and getting inside the channel over again gives bulls chances for a 650 points move from there which will be almost 6200 in Nifty. The breakout point comes around 5500. 
• Stochastic oscillator and RSI are ongoing with lower tops formation and edging downside. Both  the indicators are in the neutral zone. Hence a trend wont get derived based on these indicators.  
• Towards upside 5325 -5390-5400 levels would be the immediate resistance while 5080-5030-5010 would be the support

   

GO LONG NEAR 5200 STOP LOSS 5161 - 08Nov2011

Gartley Trading Pattern-Ross beck

One of the most important aspects of adhering to any particular trading strategy is to believe that the strategy is a high probability strategy. It is very hard to believe in a trade strategy if you don't know how it works (I.E. Black Boxes.) With this in mind, let's carefully consider each of the individual legs that unfold in the Gartley Pattern to understand the Psychology behind this high probability set up.


Referring to the first example “A” in figure 27 from H.M. Gartley’s book, Profits in the Stock Market, Gartley first identifies a bearish A-B leg . This leg appears to be a significant trend move or impulsive phase with minor rallies punctuating the down trend. At the completion of this A-B leg, we notice a significant rally that is labeled as the B-C leg. This B-C rally exceeds the previous rallies in the A-B downtrend in both price and time. This B-C price action indicates that the previous downward trend might be complete and that the B-C leg might be indicating the beginning as a new impulsive trend move in the opposite direction of the previous A-B move down. This B-C leg is very typical of what happens when traders all begin to cover their short positions after a sustained bearish trend. The B-C leg completes when the short covering is complete. With this in mind, the assumption is that the market will not take out the low at point B as a new trend up will probably continue higher and never look back. Based on this information,Gartley puts his protective sell stop just below point B.Though Gartley mentions the A-B leg in his book, most educators of the Gartley Pattern omit this important aspect of the pattern.

At the completion of the B-C move, Gartley mentions that there will be a minor decline that cancels a third to a half of the preceding minor advance (B-C). In other words, Gartley is looking for a 33% to 50% retracement of the B-C move up. Why does this minor decline take place? This minor decline could be caused by traders that were anxious to get short in the previous A-B decline. These bears were waiting for a significant pullback during this bearish trend down, however the market kept missing their sell limit orders on the rallies. Now that the market has had a significant rally against the downtrend, they start selling at point C and push the market down. Depending on where they get filled, they will put their stops just above point C. This selling from the “late bears” pushes the market down into what Gartley describes as a minor decline. This original Gartley Pattern ends up having a very different look and feel compared to how it is being taught today. The original Gartley Pattern was quite a simple pattern. Gartley did not discuss any Fibonacci ratios, Elliott Wave, etc. In Gartley’s bullish example, it would appear that all he is looking for is a significant rally off of a bottom, followed by a retracement of 33% to 50%.


At the completion of the B-C move, Gartley mentions that there will be a minor decline that cancels a third to a half of the preceding minor advance (B-C). In other words, Gartley is looking for a 33% to 50% retracement of the B-C move up. Why does this minor decline take place? This minor decline could be caused by traders that were anxious to get short in the previous A-B decline. These bears were waiting for a significant pullback during this bearish trend down, however the market kept missing their sell limit orders on the rallies. Now that the market has had a significant rally against the downtrend, they start selling at point C and push the market down. Depending on where they get filled, they will put their stops just above point C. This selling from the “late bears” pushes the market down into what Gartley describes as a minor decline. This original Gartley Pattern ends up having a very different look and feel compared to how it is being taught today. The original Gartley Pattern was quite a simple pattern. Gartley did not discuss any Fibonacci ratios, Elliott Wave, etc. In Gartley’s bullish example, it would appear that all he is looking for is a significant rally off of a bottom, followed by a retracement of 33% to 50%.

As you can see, the pattern above is a complex five point pattern that has to conform to specific Fibonacci ratios on each of it’s four legs. The main differences between the modern Gartley Pattern above and the original Gartley Pattern are…


1. The labels in the original pattern are A,B,C. The labels for the modern pattern are X,A,B,C,D. 
2. The modern Gartley omits the original A-B leg.
3. The modern Gartley emphasizes the equality of the A-B leg and the C-D leg whereas the original does not.
4. The original Gartley pattern did not include any Fibonacci ratios.
5. The completion of the original pattern was at 33%-50% whereas the modern pattern completes at the 78.6% retracement of the XA move.


Larry Pesavento was the first person to apply Fibonacci ratio’s to the Gartley pattern. Larry observed that the Gartley pattern appeared to be a more reliable pattern if it completed at a 61.8% retracement or 78.6% retracement. Based on my 10+ years of experience with the Gartley pattern, it appears that if you have to choose between the two of these ratios, 78.6% seems to work the best. With my personal trading, I will only trade the 78.6% Gartley patterns. Why? I would rather trade less often and increase the chances of my wins on the few trades that I make. If you feel a need to trade more often, it may be time to take a personal inventory. We need patience to wait for good Gartley Patterns, remember Gartley himself said, “The art in conducting an operation of this kind lies in..Having the patience to wait …”. In addition, one of the added benefits of using the 78.6% retracement is its proximity to where our protective stop is located. Remember Gartley said,” In the other two cases, only small losses have to be taken”. So if we choose the 78.6% versus the 61.8% Fibonacci level to enter, our risk will be reduced if we use the location Gartley suggested for our stop. If we are wrong, we will risk less money with an entry at 78.6% versus 61.8%.


One of the other reasons that I prefer the 78.6% level is that the public is typically unaware of this level as it does not appear in the defaults of most Fibonacci retracement drawing tools. Therefore there is contrarian value in using this level. Also, by the time a market arrives at 78.6%, most of the typical 61.8% fib traders have been stopped out. At this point in time, there is a lot of uncertainty as traders watch for a bounce or a break based on their focus on the previous high or low. Also, typically there is an increase in the volatility in the 78.6% retracement area as the market begins to reflect the uncertainty of its participants. The volatility in this zone will help us if we enter with a multiple contract strategy that allows us to leverage the scale out of the market.

Quick Fibonacci Revision

Between stimulus and response lies our freedom to choose -steven covey
Nothing is stopping you from what you wanted to be ,its you 


1.Minor retracement 0.382 or less is indication of strength and it point of leg go along with the trend.
2.If retracement exceeds 0.786 is an indication of change in trend .(use to place stops)
3.Fibonacci is predictive and not lagging.
4.Fibonacci adapts to volatility and exists in all time frame.
5.Symmetry move- predicts where market may likely to go.
6.161.8 should coincide with critical support and resiatance zone (Go against the trend)
7.If market break through the structure ,123.6  is tagrget (70%)
8.If market break the structure 123.6 ,161.8  is tagrget (50%) -always trade with minimum position 
9.Two things happen at 123.6 -Consildation and reversal./consolidate and continuation 
10. Take action only if one of the below is  available at Fib Ratio
1.Resistance and support
2.pivot 
3.Symmetry
4.trendline
11.When RSI rebounds from overbought and oversold region ,it will not touch the same height (at least not immediately.)
-slingshot trade
12.At 123.6 /161.8 look for area of confluence of ratio for posibly going against the trend.-Confluence trade
13.Enter a counter trade in death zone ,Buy on dip between 0.50  and Golden Ratio (0.618) stoploss(0.786) -Pullback trade


14.AB=CD 
 The AB=CD pattern is a price structure where each price leg is equivalent. The Fibonacci numbers in the pattern must occur at specific points. In an ideal AB=CD, the C point must retrace to either a 0.618 or 0.786. This retracement sets up the BC projection that should converge at the completion of the AB=CD and be either a 1.27 or 1.618. It is important to note that a .618 retracement at the C point will result in a 1.618 BC projection. A .786 retracement at the C point will result in a 1.27 projection.

15.Alternate AB=CD

Potential Reversal Zones (PRZ) are defined by 
AB=CD
1.27AB=CD
1.618AB=CD

16.Gartley Pattern

The above Gartley example shows an uptrend XA with a price reversal at A. Using Fibonacci ratios, the retracement AB should be 61.8% of the price range A minus X, as shown by line XB. At B, the price reverses again. Ideally, retracement BC should be between 61.8% and 78.6% of the AB price range, not the length of the lines, and is shown along the line AC. At C, the price again reverses with retracement CD between 127% and 161.8% of the range BC and is shown along the line BD. Price D is the point to buy/sell (bullish/bearish Gartley pattern) as the price is about to increase/decrease.

5 FUNDAMENTAL TRUTHS TO TRADING

Mark Douglas, a person I consider one of the pioneers of trading psychology talks about these 5 Fundamental Truths to trading along with 7 Principles of consistency in his book Trading In The Zone (A book ever trader should own). I think it’s really important to understand all of these truths and principles and believe them if you want to be consistent in your trading.


THE 5 FUNDAMENTAL TRUTHS OF TRADING:
1. Anything can happen.
2. You don’t need to know what is going to happen next to make money.
3. There is a random distribution between wins and losses for any given set of
variables that define an edge.
4. An edge is nothing more than an indication of a higher probability of one thing
happening over another.
5. Every moment in the market is unique.


THE 7 PRINCIPLES OF CONSISTENCY:


1. I objectively identify my edges.
2. I predefine the risk of every trade.
3. I completely accept the risk or I am willing to let go of the trade.
4. I act on my edges without reservation or hesitation.
5. I pay myself as the market makes money available to me.
6. I continually monitor my susceptibility for making errors.
7. I understand the absolute necessity of these principles of consistent success and, therefore, I never violate them.