031104
A lot of Wave59 users tend to focus intensely on many of the tools in the "indicator" category, such as the 9-5 Count, UltraSmooth Momentum, Exhaustion Bars, etc. While there is nothing wrong with these tools, (I'm not complaining!) it is also important not to become fixated on a particular style of tool to the detriment of another entire category of analysis. Due to a couple calls I've received this month where users were very comfortable with tools in the "Technical" menu but totally unfamiliar with anything found in the "Drawing" menu, I've decided to spend this issue taking a look at a few of the basic drawing tools found in the program.
As we all know by now, best results are obtained when you blend many different tools together, then look for confluence signals between them. Last time we discussed using this philosophy in the realm of astro tools. This time, we'll take a look at using it with drawing tools.
Below is a daily chart of IBM:
IBM spent the first six weeks of 2004 in a sharp thrust up to 100. Nice round numbers like 10, 100, and 1000 always seem to be important when it comes to support and resistance levels, so for that reason alone, this was a good area to be alert. On the chart above, this area is marked with a big red arrow.
At this spot, we find the market moving into a lot of resistance. Using a few Fibonacci and Andrews techniques, we were able to pinpoint the Feb high basically to the tick. There are two resistance levels shown on the chart above. The white one is a standard 223.6% Fibonacci retracement level from the swing E-F. We basically measure swing E-F, multiply by our ratio, then extend back from point F. The pink one is a 161.8% Fibonacci expansion level, measured from D-E, but placed at swing F. What that means is the distance between swing D-E is measured, multiplied by our key 1.618 ratio, then added to the low at F. Note how both the expansion and retracement levels cluster together very nicely.
The next tool to look at is the red Andrew's pitchfork. Nothing too special to say about this one besides noting that it adds both a time and a price element to the mix.
A more interesting pitchfork is the teal one based on swings A-B-C. This is a down-sloping pitchfork that the market vibrated along for a month starting December 16. Since the market is outside the range of the basic pitchfork, we can extend it by giving it more prongs, spaced at the correct interval. These are called Warning Lines in standard Andrews terminology. You can create them using the Action-Reaction drawing tool. Basically, set the main line equal to the center pitchfork line, then set the spacing equal to the outer pitchfork lines. The Action-Reaction tool will draw as many additional warning lines as you require. Note that we have a warning line coming down right on our big red arrow, intersecting the red pitchfork line and Fib levels right at the high.
So take a look at how many tools are clustering in a very narrow range. We've got two Fib levels, two pitchforks, and a natural number (price = 100). So just using basic drawing tools, we were able to find a great turning point in IBM.
There's nothing special about these particular drawing tools. What is special is how they all came together very tightly right on top of price to mark the high. Each tool will have some ability in marking support and resistance levels, but when you get a bunch of them together like that watch out! We could go into more depth on this trade by taking a look at the 9-5 Count, etc, but since the focus of this showcase page was drawing tools, that will be left as a homework lesson for the reader.
Happy trading, and stay tuned...