Only Price Matters!

Part 1

Below is the Amazon (AMZN) daily price chart. I have removed all moving averages and prior period pivot levels that I typically show on my charts and there are certainly no indicators such as RSI, MACD or any other unnecessary momentum indicators that I don’t show on my charts. Just price is showing! I’ll add back the 8 SMA bands and the prior period pivot levels later on so you can see all the tools that I use but let’s start with a price only analysis. On the chart below, candle #1 occurred on 1/24/22. It’s a potential bullish reversal candle that formed following a 19% decline in Amazon price over the previous 10 days. Let’s say I happen to notice that large bullish candle just prior to the close on that day. Do I buy some Calls or Vertical Call debit spreads on the hope/possibility that it truly is a bullish reversal candle? I don’t. I wait to enter a trade on the following day or even multiple days later if certain conditions are met. The fact that I wait until at least the next day should be good news for anybody who doesn’t have a chance to review their charts until after the market close. You don’t need to be watching the price action all day to use this setup! After the close I put a Fibonacci retracement on the candle starting at the low and ending at the high of the 1/24 candle. I show the 50% and 61.8% retracement levels of that day’s price range. I refer to that area as the HB (Half-Back) zone and since this is a potential bullish reversal that area is a support zone. On the day following candle #1, I would add a long Delta position such as a Vertical Call debit spread anywhere between 2780.33 and 2802.97. That is the top and bottom of the HB support zone. The stop level on any bullish trade made using the HB zone method is the low of the potential bullish reversal candle. In this instance that would be 2707.04 low of the 1/24 candle. You might think that is too big of a range to trade since that’s almost 100 points from the potential entry level to the stop level! However, 100 points on a $2700 stock is just .3%! That’s less than 10 points on a $270 stock or just 3 points on a $100 stock. Not so bad, right? Look at the chart below and then I’ll add some context to the analysis.

So how well did the HB zone support hold over the following days and weeks? Price found support in the zone over each of the next 4 days. Wait a minute! Price didn’t find support inside the zone on 3 of those days! It dropped below the zone. That’s true. While the zone often holds within a few cents there are times where price overshoots it but here’s how you can interpret those times when price exceeds the zone. First, since this a support zone I’d want to see price close the daily candle within or above the zone. Only the 2nd day (candle #3) closed below the zone but just barely. The other day’s closed within or above it. Secondly, and most importantly, price never dropped below the bullish reversal candle low. That was the stop level, right? There was absolutely no reason to exit a long Delta trade since the stop was intact! Price then began a 570 point (21%) rally from the bullish reversal candle low. Before I move on to the next chart, notice that the HB support zone of the 1/24 candle continued to provide support for the stock price; once on 2/3 and again on 2/24. I don’t take any prior HB zone support or resistance off of my charts until price invalidates them!

On the next chart below I’ve left the HB zone of 1/24 bullish reversal candle (#1) on the chart but I’ve changed the color of the zone from green (support) to red (resistance). That’s because, on 3/7, that large red candle closed solidly below the support zone. That basically invalidates it as important support for future price action but since ‘what was once support can now become resistance’ I’ve kept that zone on the chart for now and changed it to red. Now, back to that large red candle on 3/7. It closed below the 1/24 support zone but did it drop below the 1/24 low? Nope! That’s interesting. Price can’t get any downside price action going without taking out the 2707 low. The very next day, 3/8, labeled #2 on this chart, price did take out the low but then rallied back above the low where it closed the day. Hmm…that looks like a potential failed breakdown where sell stops are triggered and then price reverses. How do I trade that? The same way I traded the 1/24 bullish reversal. I put a Fib retracement on candle #2 and look to get long the following day in the support zone of candle #2 with a stop on the low of candle #2. How’d that work out? Look below and decide for yourself. BTW, notice that the high of candle #2 and the following candle were finding some resistance from the HB zone of the 1/24 candle (#1). Coincidence? I’m not a big believer in coincidence when it comes to trading. Every clue means something!

On the chart below I’ve zoomed in so you can see the details of the past 11 daily sessions. AMZN had a huge gap up on 3/10 (candle #1) after announcing a 20-1 stock split. Here’s our opportunity to analyze some real-time price action instead of past action! After the gap up and strong rally price pulled back late in the session to form a less than impressive green candle. Still, it did hold the gap and closed higher than the open so, all in all, a reasonably bullish day. What clues am I looking for here? Well, I can put a HB support zone on that 3/10 candle and see how well that support holds the following day. Aren’t HB zones just for bullish or bearish reversal candles? The zones work really well on reversal candles but they also work on trending candles! Since price gapped up the previous day I’ll expect that **if this is the beginning of a strong uptrend** in price then the HB support zone of each prior day’s price range should provide support for the following day’s price. That should continue for each day if a strong uptrend. In fact, in a strong uptrend, price often doesn’t even pull back into the prior day’s HB support zone before continuing the rally! So, if I see price failing to respect HB zone support then I’ll assume price is not in a strong uptrend and perhaps it is even failing to be in any uptrend at all. So how did AMZN perform on the day following the gap up? Opened on the high, failed to find support in the prior day’s support zone and closed on the low. Yuck! It did hold above the prior day’s low but I wouldn’t put a single penny of my money into a long Delta trade in AMZN based on the current day’s close. Would you? In fact, I could make a good case to say that if price can’t hold the 3/10 low at 2879.56 (target #1) it’s likely to fall to target #2, #3, or even #4 over the next few sessions. Finally, always ask yourself, where is my expectation proved to be wrong? Certainly if price takes out the high of the current candle at 2993.50 my current analysis is wrong. I wouldn’t even expect it to take out the HB resistance zone of the current candle. What level is that zone? You figure it out and let me know!

That’s all I have for now. When I have time I’d like to add more charts showing the 8 SMA bands and the important prior period pivots (daily, weekly, monthly, yearly, high/low/HB) on these same AMZN charts so you can see the whole picture. In the meantime, I hope you’ll agree that there is so much information just looking at price that you’ll consider simplifying your charts to get rid of a lot of extraneous noise!

Part 2

As promised in part 1, now I’m going to isolate the price action in AMZN using only the 8 SMA bands. I use a declining upper band as resistance and a rising lower band as support on my charts. On the chart below I have the daily chart on the left side and the weekly chart on the right side. Notice the candle labeled #1 on the daily chart. Price is well above the upper band and the upper band is rising so price is clearly in an uptrend. No worries for the bulls, right? Before we give price the ‘all clear’ sign look at the weekly chart. The candle labeled #2 is the same time that the daily candle #1 was forming. Price was approaching the declining upper band resistance on the weekly chart. Not exactly a good time to be long AMZN Deltas! In fact, that resistance area on the weekly chart has held and price has dropped as much as $600 from there!

Below is the daily chart featuring all of the interactions between price and the 8-day SMA bands.

That’s all for part 2. Coming soon… part 3 will feature the important prior period pivots that I also have on my charts.