The Dow hits my target

With markets extremely volatile, you need to be quick on your feet to trade successfully. John C Burford looks back on a profitable trade in the Dow Jones which went almost exactly as he had planned.

Because of the moment-by-moment changes in the political landscape of Europe, which are being mirrored in the extreme volatility in the markets, I thought I would briefly follow up on yesterday's article on the Dow.

Yesterday, I wrote: "Right away, I can count waves 1, 2 and 3. Wave 3 is textbook it is long and strong. As I write, the market is rallying in a likely wave 4.

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"When that wave tops out, I expect a move to a new low beneath the 11,675 level in a final wave 5, with a possible positive momentum divergence."

To cut to the chase, since I wrote those words, the Dow has followed my script almost word for word.

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It has put in my wave 4, has moved to beneath my significant 11,675 level, and has created a positive momentum divergence on the hourly chart:

11-11-03-MWT1

(Click on the chart for a larger version)

The only flaw has been the inability to move below the wave 3 11,612 low from Tuesday.

But that's OK, since we sometimes find a shortened wave 5, which we call a truncated fifth.

Where should I take profits?

Naturally, when the market moved back down this morning to test the 11,675 support line, I was very much alert to this possibility.

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This level has acted as strong support and resistance in the past, and I have no reason to believe its power has waned.

And because I was alert to a possible reversal upwards (because we've now had the fifth wave of the Elliot wave move, and so could expect an A-B-C reversal to be coming up), did I have a spot where I could take profits on my short trade? A spot above the market, if it were to be reached, would indicate a likely strong upward move?

The answer is yes!

Take a look at the 15-minute chart:

11-11-03-MWT2

(Click on the chart for a larger version)

As the market was making its low, note the small inverted 'V' shape as the market made a low, rallied up, and then put in its final low.

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Trader tip: After a strong move, such as we have here, look out for these Vs, as they afford a logical place to exit a profitable trade.

And since the market was trading around my lower tramline, that was an additional reason to suspect a bounce.

So the area marked by my purple bar was a good place to exit the market, and that is what I did.

I took a very nice 400 pip profit from my short trade from last Thursday.

As I write, the market has rallied around 200 pips from this morning's low, but momentum has become over-stretched (marked by purple box).

I have just released my latest video tutorial on 'momentum' see it here .

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I expect very congested markets in the near term, and I will be observing the action to see if another low-risk pattern develops. But I hope I will see an A-B-C upward correction to the five wave move that would be ideal.

I have seen a lot of market action in my trading life, but I can say that this present period is one of the most interesting, and profitable, ever.

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:

Trading with 'momentum' The essentials of tramline trading Advanced tramline trading An introduction to Elliott wave theory Trading with Fibonacci levels

Don't miss my next trading insight. To receive all my spread betting blog posts by email, as soon as I've written them, just sign up here .

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