More kisses – this time from the Dow

Tramline kisses are a crucial clue that can tell you where the market is heading to next, says John C Burford.

In my final Trader post, I thought I would have a little fun with the Dow as a farewell offering.

It is my contention that it is far better to have a mediocre trading system using a tight set of money management rules than it is to use the latest gee-whiz system with a loose set of money management rules.

That is why I have emphasised that control of risk is far more important than any method you may use to research your trades.

Today, most spread betting firms are upgrading their platforms to incorporate every possible bell and whistle to accommodate traders who wish to micro-manage their system. Naturally, I am not a great fan.

I believe in keeping things as simple as possible. When you do, you can keep your mind clear of clutter. Clear thinking is essential when trading. Just because technology today can give you a vast range of indicators, doesn't mean you should use them.

That is why I use hourly and daily charts most of the time, and use only one oscillator momentum which is the very first technical tool ever invented. My other input is sentiment.

So today, I will illustrate in the Dow how I use my simple tramline methods to find high-probability/low-risk setups for swing trades. Remember, I wish to capture swings of several hundreds of points. I am not interested in scalping markets where a move of 20 pips is considered a huge move by some.

That means I can use protective stops of 40 80 points most of the time and more importantly, I can set resting limit or stop orders ahead of time, thereby allowing me to do other things such as walk the dog.

I have used the Dow extensively in my posts as a market that conforms very well to my tramline analysis (the S&P 500 is almost as good).

Here is the current chart showing the huge bull run up off the February lows.

16-4-29-MWT-1

Since February, I have considered the rally will be an A-B-C three up with the C wave turning into a five up. I have followed this rally and attempted to count the waves and just when I believed I had a fifth wave top, the market catches another bid and moves into new highs.

Naturally, this has been a somewhat frustrating period. I have caught one or two rallies with winning trades, but have always kept one eye on the exit door.

I have had the tramlines shown in place for some time, and then the centre tramline was broken early this month, I believed I had caught the start of the long-awaited turn down. But it was not to be and the market moved up to make new highs. And these highs made superb kisses on the underside of my tramline. That is a very important observation.

I have shown many examples of this tramline kissing behaviour in fact in last Friday's post I showed another triple kiss in EUR/USD.

Note the prior pivot points (PPPs) on the upper tramline a sure sign of its reliability as a line of resistance, especially with the multiple highly accurate touch points along its length. You should always look for potential tramlines that have at least one PPP and more than three accurate touch points.

It is important to understand what is happening in a kiss. Until the tramline break, the line acts as support. But now, the line acts as resistance and repels all attempts at breaking through. The nature of the market has changed. Rallies are now turned back whereas before, rallies were supported.

You may ask why are traders as a group now selling rallies and before they were buying them? Did word go round? Did they all react the same way to a piece of news? Did the bulls get tired of holding shares and saw another promising investment? Did the bears suddenly gird their loins and start shorting in droves?

We shall likely never know, but with the Daily Sentiment Index running well over 80% bulls recently, could there be much more firepower left at the disposal of the bulls?

Now with the sharp break yesterday, the market has hit T3 a normal place of support. I would expect a bounce of some kind here.

So, have we seen the high and has the decline resumed? Here is the chart I took yesterday morning:

16-4-29-MWT-2

I have a clear five down and that is the first thing I look for when I suspect a trend change. The relief rally is in a classic three up and note waves A and C tops were kisses on my tramline. Nice. I have a textbook five down/three up.

That cemented my bearish view and when the market bounced off the lower tramline, I could confidently forecast the market would resume its decline after this bounce.

And this is the position this morning:

16-4-29-MWT-3

Following my bounce, the market was hit hard last night and moved below my tramline, which is currently being tested.

All along, there have been several good trade entries that offer low risk did you spot them?

Recommended

A recruitment firm to bet on as the world gets back to work
Trading

A recruitment firm to bet on as the world gets back to work

Recruitment consultant Hays has been volatile, but results are strong and trends encouraging. Matthew Partridge explains the best way to play the shar…
20 Jun 2022
Domino’s Pizza’s share price will heat up again – here's how to play it
Trading

Domino’s Pizza’s share price will heat up again – here's how to play it

Investors have lost their appetite for Domino’s Pizza chain, but the shares are cheap, says Matthew Partridge.
10 May 2022
Why and how to short Coinbase shares
Trading

Why and how to short Coinbase shares

Coinbase, the only listed cryptocurrency exchange, will struggle to stay ahead of circling rivals. Matthew Partridge explains how to play it.
25 Mar 2022

Most Popular

When will interest rates go up?
UK Economy

When will interest rates go up?

New interest rates will be announced today (2 February) – we look at what to expect.
2 Feb 2023
Top 10 areas most immune to a house price crash
House prices

Top 10 areas most immune to a house price crash

New research pinpoints the towns, cities and London boroughs most insulated from house price falls this year - and which are the most exposed.
31 Jan 2023
February’s Premium Bond millionaire winners revealed – how to check if you’ve won
Personal finance

February’s Premium Bond millionaire winners revealed – how to check if you’ve won

This month will see the 500th premium bond holder celebrate winning the million pound jackpot in this month’s draw. We explain how to check if you’re …
1 Feb 2023