The greatest resource for testing strategies or chart analysis ideas is found in the charts themselves. There’s 100 years of history is some charts so you can go back in time to test out an idea to see what the results might have been. This short post is going to do just that…go back in time. See if you can guess when this happened without looking at the date on the chart.
Following a long, multi-year rally in tech stocks, a potential bearish reversal candle showed up in the monthly chart. That long upper wick following a strong move up is a definite warning sign. The way I’d typically trade that is to short at the 50%-61.8% Fib retracement zone of that candle with a stop above the high. The following month wasn’t able to reach that zone and instead moved lower. That’s generally a sign of weakness. The next good short location is to follow price by drawing and redrawing the Fib resistance zone as price moved lower and short a rally that rallys back up to that zone. Most traders will instead chase price lower getting short near the point where price reverses back up trapping them in losing positions. Don’t do that!
The chart below shows what happened following that initial rally off the first move lower from the all-time high (ATH). A very small drawdown on a short position established at the 61.8% Fib followed by a huge gain on a short! Since we’re looking at a monthly chart we should know that it wouldn’t make sense to initiate a trade that has a few weeks to expiry! A possible short trade could’ve been made using a very far (cheap) out of the money (OTM) Put or Put Vertical debit spread with 6+months of duration. Any variation of that type of trade could’ve been rolled down to reduce cost if desired or would’ve be incredibly profitable if left in place until price indicated it was time to exit or hedge (or some of both) by closing above the 3SMA upper band. If you haven’t already cheated by looking at the date on the chart and you guessed this was the tech wreck, otherwise known as the dot-com bubble, congratulations!
Below is the current NDX chart. Take what you’ve observed from history and figure out what to look for in the current time frame. Post some comments below!
Before I end this post I’d like you to take a look at this article by Greg Morris on Stockcharts.com. If you click on the image below it’ll open a new tab to the complete article. I’m not here to dump on Greg’s work. He may be a successful analyst and trader for all I know. I’m simply pointing this out to highlight how not having an open mind to different ways of analyzing price action can lead to missed opportunities to improve your results. The fact is that the Fib retracement zone of a reversal candle, strong continuation candle, or prior range can offer important context in understanding price action as well as indicating good trade location where trades can be initiated and targets and stops can be set. Don’t take anyone’s word as the gospel truth, including Greg’s or mine, take what you learn, test it, improve it or discard it. It’s your money, don’t bet it on anyone but yourself!
I always like to have comments to know what you all are thinking so leave them down below and make sure you follow me on X @VegaOptions.
Greg should tell his analysis to the planets, which are spaced at Fibonacci ratios…. 0 is the threshold to the negative and positive.
For your NDX example, the current value to watch for is the Fib retrace levels on the March candle, coming in at 19668 to 20,205. The halfback is 19936. Ideal level to short would be 20,205 and keep a stop at the top of the candle.