Matthew Kerkhoff, options expert and editor of Dow Theory Letters, continues his 14-part educational...
How to Train Your Eyes to See Charts Like a Pro (Part 1)
08/16/2010 11:11 am EST
Several years ago, I spoke at a Traders Expo in Las Vegas and showed a chart and made a comment in an interview that the Dow was on the way to testing 7200; the Dow was nearly 14,000 at the time. I stated that should that area give way, the Dow should head down to test the support at 6500 and perhaps even the major support at 5500. As we all know, Lehman Brothers failed shortly after that interview and a major selloff in the Dow began, ending in a low right around 6600. After the selloff, I was interviewed again and asked if the selloff was going to continue. I answered that there seemed to be two possibilities in my mind
- The selloff would intensify and test what I considered to be major support at 5500 (some people were calling for 2400 in the Dow!). Then prices would stabilize and we would trade in a wide range for the next three to five years, as investors sorted through the surviving companies and “real” value was identified.
- Or as in Japan, the bearishness was so pervasive and the government was so willing to pump trillions of dollars into an economy with little or no demand that we may have seen the lows and were now entering into the long period of consolidation. This period should be marked by a partial recovery of the market and then a long period of range trading while companies either recovered in value or simply disappeared.
In either case, I said, we should be entering a long period where commodities, currencies, and interest rate instruments would be the markets where real sustainable movements occurred. This period might last as little as five years, but could easily stretch on for another 15 or 20 years. As a student of history, I know that if one area of the economy (stocks, in this case) remained relatively stable in movement, money flows will seek out volatility, because that's where money is made, and that's where you'll be able to track the true flows.
And that's what we have seen. The stock market has been relatively well behaved, while the real moves have been seen in the commodity, currency, and interest rate markets. I have been telling my Market Geometry mid-day session members for over a year to grab the “easy money” off the table in the bond and note futures, and I want to diagram out the market structure, context, and a simple entry setup I have shown in a prior article to get on board these moves, whether you are looking for eight ticks or 100 ticks!
Here's a US bond futures chart that I haven't marked up yet. Does anything catch your eyes? You'll need a focus point or area to begin with.
Did you find one? Draw it on the chart if so (you can draw it mentally on the chart or literally print out the chart and draw it in).
This simple multi-pivot line cutting across the action caught my eye first.
By drawing in this line, my perspective has changed and the price action begins to come into focus for me.
Did you see this line?
Now that you see what caught my eye, if you didn't see this line, add it to your chart. Does it clarify your focus of the current price action?
Let me “pull back the curtain” and show you what I see now that my perspective and focus has changed.
I added another multi-pivot line and marked the swing highs and lows. Then I watched the market a bit more to make certain my perspective was meaningful.
Take the time to mark your charts like this—all your charts—for as you watch and trade the market, your skills as a chartist, and more importantly, as a trader, will improve dramatically.
More tomorrow in Part 2…By Tim Morge of MarketGeometry.com
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