That's almost word for word an the first line of an email I received. That makes me think two things, first, I have to bring my crystal ball back from the shop and second, maybe I need to stop giving out my email.
(kidding, kidding! I love getting emails from traders and students, truly)
I don't know when, where, and in what language I gave anyone the impression I pick tops or bottoms. I will occasionally trade range-bound markets - shorting ceiling, buying floors. But the idea that I will actively look for a short in an uptrend or a buy in a downtrend is the furthest thing from my mind...until I get an email like this. (You see it feeds the "pig in the head". It gets the "pig" curious. Hmmm, well since curiosity is a cat killer, is the pig any safer?) I like to mock up different analysis scenarios on my charts. Trader role playing... So this is what I replied to the email and the charts I included. Now keep in mind, even though I spend the first few sentences of my reply chastising this poor fellow (I'm going to leave that out), the analysis that I sent and am sharing here was serious, I wasn't playing around. IF I was a top and bottom picker, here's how I would do it...
In this example, I am toying around with the idea of a Dow Theory reversal. Ideally this pattern should rally to a 2 point perhaps at a Fibonacci or psychological number level and reverse lower. Then leave a 3 point which could ideally (again) be at a Fibonacci or psychological number. I like when the 3 point either make a 50% retracement or better yet a double bottom without going lower than the 1 point. Add to that I prefer to see this set up take no less than ten trading days and no longer than 20 trading days to develop and trigger. See even when playing "make believe" I specific about what I want!
Crude is an easier story to tell because it's not really a top picking set ups at all. Even though I was long the CL contract and still am long via call options and the USO, I have been very upfront about the 150 resistance and the psychological significance of it. I have also discussed that current price action and the frequency of pullbacks to the Wave are the first steps into the distribution market cycle. I think the likely scenario here is a two to four o'clock Wave. For anyone looking for a Wave reversal short here, I don't like the set up. This is not the kind of rally that simply reverses in a "V" pattern. It's going to take some time to shake the buyers off the uptrend and that's exactly what the distribution cycle does. I should mention that when playing scenarios, be sure to have a scenario for both sides of the market. Also, feel free to have multiple scenarios. This way you are more likely to recognize and be prepared for the trades as it develops...in essence you have seen it already!
The AUD/USD had a really sweet Fibo on the daily. And if you're going to pick a top or bottom in any market, it's best to do it off the daily. I could have also done a mock up of a Dow Theory reversal but in the interest of simply diversifying the top picking approaches here I'm going with Fibonacci, extensions in this example. The 1.618 was hit really solidly and left behind a good size wick. The level is also further reinforced by the "50" pip level. The AUD/USD and the U.S. Dollar Index have an inverse correlation but remember that the aussie is a "split personality" as it's a comm-doll too. That means factoring in the trend in gold. Gold is still in an uptrend and trading above the Wave. It's also below 1000 and that's going to be an important resistance level (again). Last time we broke 1000, it was a short lived move and reversed and started the distribution cycle were in now. Since the mid-March run through 1000 and the subsequent pullback, I'd say that there was a one month span where gold was in a downtrend (four to six o'clock Wave) from mid-April to mid-May. Other than that, the Wave's been two to four...distribution. So there you have it. but remember just because you can set the trade up doesn't mean you should take it. And by the way, the most realistic set up to me is the AUD/USD short...love that Fibo ceiling.
- Raghee
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