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The Simpleton's Fibonacci

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I am going to use Futures and the Indexes to explain the idea of Trading Range. I have chosen to do this only because it provides easier and better examples. Students ask and traders ask me pretty much daily, “If it works for futures, will it the same work for stocks? How hard is it to trade futures?”

Stop thinking that way NOW. Everything taught in these pages works for STOCKS. The futures are a contract for where the NASDAQ or S&P are going to be three months out from now. It is therefore a bet on where stocks will be three months from now. Make it a practice to incorporate everything I say about futures into how you view and evaluate trades in stocks.
These methods work with any instrument, from CHKP to JNPR to pork bellies to OEX calls, OEX puts, puts and calls on the stocks you trade, penny stocks or blue chips.

Post/Pre Market Trading Range: (PTR)

Post-market to pre-market is a tricky area because of the lack of liquidity, low volume and erratic news event driven spikes. After 4PM you have earnings announcements and before 9:30AM you have economic announcements, rate cut rumors or even an unscheduled cut, and often times corporate warnings, or just plain media hype.

I want to be cognizant of what occurred overnight and pre-market because I need a means of expecting what may occur in the first three 13-min intervals of the market’s open. The reason for this is that, it isn’t possible to determine a day’s Immediate Trading Range (ITR) until both an intra-day MSL and intra-day MSH have formed. This usually takes the better part of the first hour of trading. Sometimes longer.

What happens in this “Third Market” is it opens with the GLOBEX futures trading at 4:45PM and runs to the next day @ 4:15PM. But I trim that range down to from 4:45PM to the open of the normal market the next day at 9:30AM. This is what I think of as “PTR.”

Here is an example of the PTR from Wednesday July 18th to the market open of Thursday July 19th. I choose this because it had an abnormally wide PTR.

When charting PTR, I always use 13-minute ALL SESSIONS charts to eliminate the “noise” that comes from low liquidity spikes in intervals overnight. You could also opt to use a 21min chart, 34min or even a 55min. (As long as it’s a Fibonacci interval!)

1. The PTR Market Structure Low formed at 5:24PM on 7/18/01. The low of this MSL is 1655.00

2. The PTR Market Structure High formed at 9:00AM the next morning. The high of this MSH is 1724.50.

3. Post/ Pre-Market Trading Range (PTR) is established by subtracting MSH- MSL. In this case 1724.50 – 1655.00 or 69.5 points. *It’s very important to note that when computing trading range that it is NOT the high and the low that is used, it’s the high of the MSH and the low of the MSL that’s used.

I use only existing Market Structures for trading range. An example would be if at the time trading was occurring higher then the MSH that has formed, but no “new” Market structure had formed. Use the highest existing MSH and the lowest existing MSL at the time you are making the calculations.

4. Market opening candle on 7/19/01.

I can now plot the expected pivots for both support and resistance using the Fibonacci growth ratios previously outlined against our known PTR of 69.5 points:

*These calculations can be made live using our online Trading Range Calculator at http://www.kingcambo.com/rangecalculator/

I have entered in the MSH and MSL data for overnight. I now can see the areas of support are likely to be 1698.14, 1681.86, 1655.50, 1629.14, 1612.86 and then 1543.86 in descending order.

Resistance will be 1681.86, 1698.14, 1724.50, 1750.86, 1767.14 and then 1836.14 in ascending order.

These will be my first projections as to where we might be headed in the first hour of trading, until the days Immediate Trading Range (ITR) is established. Let’s take a look at what actually transpired:

1. The market opens ABOVE our first two resistance projections of 1681.86, 1698.14, but BELOW overnight resistance of 1724.50. Accelerated buying occurs when a MSH (in this case 1724.50) is taken out.

2. The MSH fails in this case by 9:43AM. Our next projected up wave is a target of 1750.86. We see a first MSH form at 9:56AM – however it fails 3 candles later. Look where the days real ITR Market Structure High forms:

3. The real ITR/MSH forms at 11:14 AM at 1750.00.

4. The ITR/MSL tries to form and fails.

5. The day’s real Immediate Trading Range MSL forms at 1686.00.

This is why I treat PTR as its own separate session, to plot what may happen BEFORE the day’s Immediate Trading Range – ITR – can be established.

Immediate Trading Range: (ITR)

A day’s Immediate Trading Range then is the range between the strongest market structures that form on an intra-day basis. For identifying where these occur, I prefer to use 3-min data. The reason being, 13-min data can often take most of the day to develop, so it isn’t as useful to an active trader. Additionally, 13-min trends are what we use to calculate Greater Trading Range (GTR), which is the stronger trend, and will be dealt with next.

Let’s take a look now at the early trading for Friday July 20, 2001.

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"It takes a man a long time to learn all the lessons of all of his mistakes. They say there are two sides to everything. But there is only one side to the stock market; and it is not the bull side or the bear side, but the right side. It took me longer to get that general principle fixed firmly in my mind than it did most of the more technical phases of the game of stock speculation" ----from REMINISCENCES OF A STOCK OPERATOR