As many of you probably know, I like to look at trading from a very systematic perspective. That way I can apply the identical analytical approach each time. I maintain my analytical perspective and make unemotional decisions. It is from this systematic approach that I am constantly able to identify setups, regardless of the time available to me. As David comments it is not extraordinary things I am doing, it is rather ordinary things, extraordinarily well. It is the disciplined routine that now is a habit that has allowed me to identify setups and take advantage of them frequently.
Everyone will have different time constraints and preferences for when they prefer to look at the markets and analyse their trades. It is important to understand yourself as a trader and what type of trading you are comfortable with and it is just as important to get into a routine each day so that you can leverage off your trader characteristics, so you can establish a concrete routine each day.
I find the best time to look at setups on Australian equities is at the end of each day around 6pm (AEST), which provides enough time to receive all necessary data. But what works for me isn’t necessarily going to work for you. Maybe the best time for you is after dinner, or it might be at 6 o’clock in the morning before you begin the morning rush. If you are looking at overseas markets then perhaps mid-morning would work better, but once again it all comes back to your personal characteristics as a trader.
I have outlined my analytical approach below. I have found this to be the most efficient way to analyse a market given I am happy with the pattern from a simple eyeballing of the chart. It is really a simple tick or cross, given the market meets the criteria.
|Ranges Resistance Card||Is the market around any 50% levels or pivot points?||1 - 2 minutes
|Highs Resistance Card||Is the market around any 50% levels or pivot points?||1 - 2 minutes|
|Lows Resistance Card||Does the market sit on or around any 100% multiples?||1 - 2 minutes|
|Position of the Market - Monthly||Can I see the four sections on the monthly? Measure in time and price.||5 - 10 minutes|
|Position of the Market - Weekly||Zoom into weekly and apply the same analysis. Measure in time and price.||5 - 10 minutes|
|Position of the Market - Daily||Zoom into daily and apply the same analysis. Measure in time and price.||5 - 10 minutes|
|Swing Chart||What does the momentum of the chart suggest? Are the bulls or the bears winning?||2 - 5 minutes|
It is really that simple and straightforward. Of course, if there is enough information suggesting this is a high probability trade I will add additional Gann techniques and indicators but realistically it is my analytical approach that gets me to the point of satisfaction prior to further investigation.
Let’s turn our attention to the charts and apply this routine. The market we will be looking at in this article is Domino’s Pizza Enterprises that is traded on the Australian Stock Exchange (ASX: DMP). As you now understand the basics of my analytical approach, we can start to pull apart the market in this very order. I like to start my process by automatically turning the chart to a monthly chart. By doing this I can see the majority of the historical data and it also makes the major tops and bottom stand out.
As you can see in the chart below. I have applied a Range Resistance Card to the chart. The all-time low was at $1.93 on 20 May 2005. The all-time high was at $80.69 on 18 August 2016. This gives us a range of $78.76. I like to keep my charts very simple and only look at the 50% level initially. Generally, if I can find something that has to do with a major 50% level, it is worth breaking it down further. In this case, the 50% level is at $39.38. The market has been able to hold above these levels. Of the two instances, the first low in August 2017 tested the 50% level and then closed above it and the second instance the market was able to close below this level on the monthly chart followed by a monthly close above this level. As I am using my systematic routine to pull apart the market I am not making any assumptions yet, I am just pointing out the obvious.
The next chart is the High’s Resistance Card. As DMP was trading relatively close to $0 when it first started trading the chart looks very similar to the Ranges Resistance Card. The all-time high was at $80.69, so the 50% level would sit at $40.35. Again, the market was able to bounce off this level in August 2017 and close under it in February 2018. As you can probably tell, there is nothing extraordinary about this process. As Safety in the Market students, we have all learnt this process. However, by looking at markets in isolation you start to have observations pop out at you.
We are still on the monthly chart, and in the chart below I have applied the Lows Resistance Card. The low was on 20 May 2005 at $1.93. As we are currently trading around the $50 mark, I have increased the price increment by a factor of ten, so $1.93 converts to $19.30. By applying $19.30 to the low on 20 May 2005 you can see that four multiples of $19.30 was close to the All-Time High at $77.20. While the market was able to break through, it still failed to close above, creating a signal reversal bar. The market has again been able to come down and test the 200% multiple (orange line) at $38.60.
If we zoom into the daily chart just to verify the lows that were made, you can see that there was a minor double bottom made on the 200% multiple of $19.30. While it was able to test this level, on the daily chart the market only spent 1 day below this level, the monthly chart suggests otherwise.
As we continue our analysis on the monthly chart, we have an obvious price cluster at $39.51 with all our major resistance cards. If you draw a horizontal line on the chart at this level, you’ll notice that the market was still able to close lower than this price level in February 2018.
If we look at the position of the market and look for some sections from the All Time High (ATH) at $80.69. The First Range Out (FRO) that occurred from the ATH to November 2016 low at $58.00 was $28.51 in 181 calendar days. By projecting this range from the May 2017 top at $67.05 we get a target at $38.54 and the low came in at $38.11, completing a range of $28.65 in 295 calendar days. There are two obvious sections here. Let’s take a deeper look to see if there is wheels within wheels working here.
After breaking down each monthly section (blue line) and turning to a weekly chart, we can see that there are four sections that have played out (pink lines). The FRO on the weekly chart showed $22.69 in 76 calendar days. This projected from the November 2016 top at $75.00 gives us a target of $52.31 and the market bottom at $52.18 in 98 calendar days. Again, if we project the FRO from the May 2017 top at $67.05 we get a target price of $44.36. The market bottomed at $39.50 – which is close to 125%. The fourth section projected from October 2017 top at $50.06 gives a 50% price target at $38.72 and the market double bottom on the low at $38.11.
If we take a step closer and look at the daily chart there was a double top formation that occurred on 13 October 2017 and 9 February 2018. Interestingly the first move down from 13 October gave a range of $7.70 in 67 days, and the move from the 9 February low made a range of $11.77 in 68 days. Safe to say a 100% repeat in time and 150% in price.
With all this information lining up, we want to be able to turn our analysis into tradable opportunities. Based on the information we have obtained through this systematic approach it is time to turn to the swing chart to determine what is happening from a momentum perspective.
If we look at the 2 weekly swing chart you can see that the final low on 2 March 2018 gave a range of $11.77 – noted from the double top range. The first higher bottom was able to retest this low and produced $5.92, which is close to 50% of $11.77 – and therefore failed at 50%. On the up swings the market was able to push $6.32 (obviously not expanding compared to the down side swing) and based on the most recent swing the market has run $10.56.
Given the market has moved into the double top area, it would be interesting to see how it reacts around the psychological level of $50. If the market fails to break $50, we might be looking at a minor triple top prior to it establishing the bottom to see it move away. Interestingly in the March 2018 issue for Platinum Article, I wrote about ‘A Golden Reversal’ on the 2016 low on gold futures. If you take the time to review this article and apply the same concept to DMP, you’d think that the market patterns were verily similar. I start to question, is this systematic routine making it that obvious that it picks similar patterns each time. I will let you be the judge.
It’s Your Perception