If you tuned into the Safety in the Market Newsletter last month, you’ll remember we explored the psychological levels for Coffee (ProfitSource: KC-SpotV) and were watching for either a break or bounce at the $100 level.
The Platinum Newsletter Article’s, however, are designed for further advancement in your trading analysis, so this month I’d like to explore the most recent move on coffee to see how you could have taken advantage of buying the bean bounce. To get the most out of this discussion, I suggest that you take the time to review the September 2018 article titled, ‘Coffee Break Anyone?’ before diving into this month’s article.
I often think that most Gann traders are not necessarily driven by the money but more so the fascination around the power and accuracy of numbers in this world. Still, to this day, mathematics is the global language of numbers. It doesn’t matter if you speak English, French or Madeiran, each language can agree that 2+2=4. Having read some of Michael Faraday’s books such as ‘The Force of Matter’ & ‘Faraday’s Experimental Researches in Electricity’, I can see why Gann grew fond of Faraday’s philosophies. Gann references Michael Faraday, the late 18th-century scientist who commented that the universe is made up of mathematical proportions. This scientific philosophy echoes through the works of William Gann.
If you refer to the chart below taken from the September 2018 Safety in the Market Newsletter article, you will see that the horizontal line at $100 covers the full history of the coffee market. The fascination around why Coffee hovers around the $100 would have anyone asking questions. Regardless of why, it is obvious that the market likes to gravitate around the $100 level and therefore can be used to your trading advantage.
Based on the most recent market action on Coffee, we can confirm that this was a tactical move by the bears. Pushing the price into the $100 psychological level before buying the bean bounce.
Buying a bounce is often a trading opportunity on any market. They can be identified where a market reaches a pivotal point, whether that be resistance, support or a psychological level. A market may be trading within a specific channel range for an extended period of time, fluctuating between support and resistance or it can make an aggressive move into a common / psychological level, such as the break of $100 on Coffee.
Having seen this pattern multiple times, it makes it relatively easy to determine the likely scenario to follow. The idea is to follow the set up through to the end (patience) and build a trading plan around the likely scenarios. As previously noted in the September Newsletter article, the bears drove the price into a potential pivotal point. Whether the market rallied or broke the $100 level, there were two likely outcomes that you could have taken advantage of. It’s more about choosing your battle’s and very much goes back to David Bowden’s comment around hindsight becomes foresight if looked at often enough.
Therefore, in the future when a market such as coffee reaches a pivotal level, you can potentially use a ‘buying the bounce strategy’ to profit from the expected increase off the pivotal level. There is no harm in wanting to confirm a bounce from a pivotal level but timely entries are essential.
In the chart below, the weekly chart confirmed the bounce. Having spent four weeks rising, the market has overbalanced the June/August 2017 reaction in price but not yet in time. It also hasn’t broken the May 2018 highs so the longer term trend isn’t fully confirmed as of yet.
Regardless of the longer term trend though, there was still a trade available. It is more of a question of what would have dictated the move in order to take advantage of the market set up?
The swing chart would have been most helpful in anticipating the direction of the market. Whether that be a potential change in trend or an explosive break, it will be the swing charts that keep us trading in the direction of the trend. In the daily chart below, you can see I have overlaid the 1 day swing chart and included the swing ranges, for ease of watching the bars.
Through the early part of September 2018 (while writing the September Newsletter Article) it was obvious that the market was moving relatively sideways waiting for an explosive move – whether that was up or down. As the market bottomed on the September seasonal date, you’d be thinking that the swing range of 7.8 was an expansion and confirmed break of the $100 level. Waiting for a pullback to get set on a short position, you’d notice the market hit its head on the $100 mark and failed to close above this level, providing the opportunity for a short trade.
Given you entered the short trade on 24 September using the FLST under the $100, you would be set short. After watching the market move on small volume and seeing the ranges to the downside contracting and the upside ranges expanding, you’d be thinking this is likely going to be a false break.
Regardless of whether the trade works out or becomes a losing trade, that is FINE! It is important that you followed your trading plan. Understand there is only short term pain in a losing trade, if it set’s you up for long term gain on a trend. David comments in the Ultimate Gann Course that he often was stopped out 2 or 3 times around a change in trend before he would get set and zoom out to watch the weekly chart.
The question is how could you minimize the risk or exposure? If you were confident enough you could stop & reverse straight away or on confirmation of the 2 day FHSB you could have moved stops, which would leave you with a minor loss. Given you didn’t see any of this happening and were stopped out, you could have taken a long position on 29 September which showed strong volume and expanding upside and contracting down side ranges – either way you would look to get long given the market had confirmed a false break.
As the market moved away, the upside ranges proved to be stronger. The downside ranges showed constant contraction. Trailing the 1-day swing chart would have held you in the trend long enough to be profitable (even if your first trade was a loss). As well as offering multiple opportunities to pyramid into the up trend.
To date, we have seen the market produce a downside range of 9.15 which is the largest down swing since the trend first started in late September. This is the winter of the trend. Waiting for further confirmation on the bigger picture would be the smart way to go. A break of the $116 level is likely needed to provide a more attractive weekly FHSB. Alternatively, the continuation of the up trend, would be attractive, given we see a break of the May 2018 highs at $125. Let’s have some patience to see how the weekly swing chart reacts for future long term opportunities.
Like always, this article isn’t suggesting exactly what is going to happen, but as mentioned in the September article, we are at the start of a potential move in either direction and therefore is important to build the likely scenarios or outcomes so that you can have an open mind. Remember to trade in the direction of the trend and as David Bowden comments we don’t want to be anticipatory stupid.
It’s Your Perception