On Wednesday, I put the FTSE in no man’s land. Since then it has tried to advance out of it, but on Friday it was beaten into a retreat by superior forces.
Just to quickly refresh your memory, this was the chart last Wednesday:
And breaking out of this zone would be a significant event.
So this morning, I want to assess the current position, because a correct reading will help swing traders determine their next trade.
The tell-tale sign of a changing trend
Here is the updated chart:
Lo and behold, the rally, which was underway on Wednesday, extended further into Friday and planted a kiss (with slight pigtail) on my wedge line. Isn’t that pretty?
That kiss beautifully illustrates the principle that when a tramline or a wedge line has been broken, that event transforms it into its opposite. The wedge line had been a line of support for many months until the clear break on 1 August. That break transformed it into a line of resistance.
Now, instead of going long on the wedge line prior to the break, the correct trade is to go short. The trend has changed – and the kiss is the tell-tale signal.
The kiss is actually one of my favourite trade setups. It offers a low risk opportunity to enter in the new direction of travel.
Now, any short trades taken at the kiss can be protected by a close stop. Even if the market does resume its rally, only a small loss will be taken. Remember, there are no 100% sure things in trading, despite our best efforts at analysing the market.
MoneyWeek Trader is our FREE spread betting & trading email offering you the very best tips, secrets and guidance from our trading expert, John Burford, who has years of first-hand experience.
Did the market reach a Fibonacci level?
I also had the hourly chart last Wednesday where I forecast an extension of the rally in an A-B-C pattern. This is where, ideally, the C wave would terminate at a Fibonacci level.
This was the chart:
Did I get my three up, and did the market reach a Fibonacci level?
Yes indeed. I have three up and the C wave ended at the Fibonacci 2/3 (67%) level. Remember, the ratio 2/3 is also a Fibonacci level despite its absence on the trading tool provided by many platforms.
You should always keep in mind that 1/3 and 2/3 are legitimate Fibonacci levels and reversals can occur at either, although reversals from the 1/3 level are quite rare.
Interestingly, over in the Dow the rally carried to the Fibonacci 62% level.
Will the FTSE break out of no-man’s land?
Now let’s zoom in and take a closer look at the relief rally on the hourly:
I have excellent tramlines with a PPP (prior pivot point) on the upper line, which has that large overshoot. Remember, an overshoot usually heralds a sharp move in the opposite direction, which did occur right on cue. It was the steepest setback of the entire rally.
Also note that the sharp decline on Friday out of the overshoot was reversed exactly on the lower line – a significant verification of that line as a valid line of support.
That means that a break of that lower line would now be a significant – and another tradable – event.
If you’re a new reader, or need a reminder about some of the methods I refer to in my trades, then do have a look at my introductory videos:• The essentials of tramline trading
• Advanced tramline trading
• An introduction to Elliott wave theory
• Advanced trading with Elliott waves
• Trading with Fibonacci levels
• Trading with 'momentum'
• Putting it all together