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Welcome to all our Safety in the Market traders to this month’s dedicated newsletter. I’ve been out on the road a couple of times over the last month, in particular in Brisbane and Melbourne for our Interactive Trading Workshops. I enjoy this workshop immensely and benefit from it myself as we are working closely on current markets for 3 days and to share views with students requires a sharpening of clarity. We also cover the subject of Price Forecasting, which for many is one of the highlights of the course. It is most satisfying to see students using Price Forecasting in their analysis when presenting their trades on day 3. This month I want to share with you a potentially exciting set-up that I sharpened up with the crew at the recent workshops.
The Dow Jones futures contract is a market that I trade quite regularly and follow on a daily basis. This market has shown some absolutely magnificent Gann based price set-ups during my years trading this contract, some terrific stuff using Ranges and Resistance Cards. If you have been to a Trading Tactics with me any time in the past couple of years, you should remember how I showed you how easy calling the top of the Dow was using a Low’s Resistance Card.
It has been a choppy last few weeks on equities markets around the world, the Dow included. We’ve seen equities markets up for nearly 9 months and an impressive percentage from the lows of March this year. The big question is always where to next and as you know I like to watch a set-up and use it as a test. Let’s get stuck into the detail of the latest set-up I’m watching on the Dow, it’s good.
Chart 1 is the daily bar chart of the $10 Dow Jones futures contract, the code in ProfitSource is DJ-SpotV. While this contract does not have the volume of the mini-Dow, it does have more history and has delivered great results for price based work. Take some time to look at the chart and then we’ll get into some of the detail.
Chart 1 – Dow Jones Futures Daily Bar Chart – Price Forecast Cluster
click chart to enlarge
Firstly we have what is hopefully the analysis that everyone starts with after a clear range has been formed and the market is pulling back into that range – a Ranges Resistance Card. In this case we are looking at the bear market range from the 11 October 2007 high (14270) to the 6 March 2009 low (6460). This is a range of 7810 points. The mid-point of the range, our 50% retracement level, comes in at 10365.
Taking a look at the move out from the March 2009 low (6460) we have a decent top on 11 June 2009 (8880). Using this range as ‘the first range out’ we can then project that from subsequent lows as David showed us in the Number One Trading Plan. The size of our first range out is 8880 – 6460 = 2420 points. The low that followed the June top came in on 8 July at 8038. Taking our range of 2420 points and adding that to the July low (8038) gives us a 100% price target for the repeating range of 8038 + 2420 = 10458. This is within 1% of our 50% retracement level on the ranges resistance card we looked at earlier. We can label this a ‘price cluster’.
Now the market has managed to make a high on 4 December at 10510. This of course slightly exceeds both our price targets, but as you can see on the chart, only marginally. Using the ‘loose garment’ approach things are still within tolerance considering this is big picture stuff. It shouldn’t be ignored though that our price targets were penetrated.
What does all this mean? If the 4 December top holds then we could be in for a substantial fall and the risk is to the downside. That being said, should the bulls come charging back in and that top is broken then we can look for prices to perhaps push considerably higher. The December top is now very important and a vital key. While the top remains in place my focus is making money on the short side, should it be broken, that flips around. It’s that simple.
This is a relatively simple price forecast but is using very clear tops and bottoms and the harmony is undeniable. There the best sort of price forecasts and what you will learn to expect when you are on the right track and things are working out. You guys might be able to find more to add to this work to help make it more complicated, I like the simplicity.
I would just like to quickly take the time to say best wishes for the festive season to all of you and I wish you a happy and safe New Year, not to mention profitable!
Until 2010...
Noel Campbell
Professional Derivatives Trader
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