Hi, all:
My main aim with this, my second post, is to discuss some current setups that I’m tracking. I’ll also provide some updates to previously discussed setups, which is something I’m going to do as a part of each one of my posts going forward–see the “Updates” section, below. This section will give me a chance to provide real-time walkthroughs of trade ideas as they unfold, whether conforming with or defying my expectations. One of the major building blocks of my perspective on the market is the central idea that price has two very distinct modes: Acceptance and Discovery. Since a “setup” to me is, by definition, a pattern of Price Acceptance on some time frame from which to anticipate a directional move, we will be able to track these ideas as they evolve from the patient, balanced trade that characterizes Acceptance to the frenetic and fast Discovery process. And, we will be able to track and observe the clues necessary to determine the direction of that resulting move. My hope is that seeing this process play out by the rules I have described will help you build your own conviction in the science of the auction, as it did for me. To get us started on this, I have included in the “Updates” section of this post two very concrete examples of this transition–recent setups in Copper and Crude Oil–as well as the important truth that they reveal about how a trend is born.
As we approach the NEW setups, keep in mind The Three Questions that I ask of every chart (covered in my first post here here):
- 1. Where is conviction on all time frames?
- 2. What is the anatomy of the auction (where do people OWN it)?
- 3. Is price in Acceptance or Discovery mode (and on which time frames)?
My charting process starts with answering these questions and drawing conclusions from them, conclusions which I’ll outline for you. I ask, in the interest of actually doing the good I set out to do by writing this blog, that you follow my logic, not just my conclusions. If by following my line of thinking, along with the analytical methods that you already possess and trust, you come to the same conclusions, so be it. If you do not, even better! Why? Because two people who agree on an instrument and a location and a time, but not on their speculative bias, have made a market. In that moment, we go from being observers of the auction process to being the observed: we become the auction itself. What better way to learn about a field of science than as the experiment?
The Sound and the Fury
First, though, a brief reflection on noise as it relates to trading–specifically the connection between noise and emotion in trading. As my trading career has progressed, and especially over the last year or so, I have focused more and more on big-picture setups. And while that has certainly been a lucrative decision for me, I think the most impactful thing it has made me realize is just how much of an instrument’s movement, especially on lower time frames, is pure noise. What do I mean when I say “noise?” Noise is sound without meaning. There are many types of sounds in life that carry meaning. Words, certainly–but not only words. A sigh, the bark of a dog, a strain of music, all carry meaning even without syntax or reference. But there are also sounds that do not carry any meaning at all, like a siren, or the buzz of traffic on a highway. Noise can be strident and intrusive, or it can be ‘background’ noise, ‘white noise.’ Either way, it is still noise: sound sans meaning.
If you have followed any part of my perspective on trading for any length of time, you will agree that the central tenets of my analysis can be summed up as such: SOME things in the stock market MEAN something very important. We may not always realize that meaning in real-time, or we may just be flat-out wrong in our interpretation of it, but there IS a science and a structure to the auction that can give us predictive insight into future price movements, giving us a huge edge against other market participants.
So, if we can agree that some things in the market mean something, and some things don’t, where does that leave us? What’s the point? As I was writing this blog post, I had a discussion with a beloved mentor of mine about how the last year has seemed to be characterized by heightened emotions nearly everywhere we looked. And while I personally have spent that time slowly zooming farther and farther out, I have witnessed more and more emotion in the various trading communities I’m a part of, as well as in financial social media. This brings me to the connection between noise and emotion in trading. The reason that noise is so poisonous to a trader’s mindset and efficacy is because of the distortion in perspective that it creates. The things that DO mean something significant in the auction are valuable, and few, and far between. We should be focused on them, and anchored to them, before, during, and after the deployment of capital. If we let ourselves indulge any level of distraction by noise–by randomness–we immediately dilute that focus. Our clarity is compromised, and our results suffer. This creates an EMOTIONAL response, causing us to dial in even further, amplifying the signals of noise and randomness even more–the sound and the fury. Soon enough, the precious, significant realities that were so clear when we were zoomed out and unemotional, are obscured entirely, and we find ourselves scrutinizing the empty signals of random price movements on meaningless time frames.
The thing is, randomness is EASILY recognizable as randomness when you zoom out. It’s only zoomed IN that we make the mistake of believing that it has any significance. Zoomed IN, everything looks significant and profound and scary. New traders often have the feeling that markets are watching THEM individually, waiting for them to deploy capital so they can hunt the stop order attached to their trade. This is exactly where this feeling comes from. Lower time frames are the wall where the innocuous movements of a child’s hands appear as menacing shadows, waiting to swallow you whole. Randomness–noise–THRIVES on these time frames, and the more you can ignore noise, the more capital–and the more sanity–you will preserve.
Setups
- NFLX was by far the best setup coming into this week. 10+ baggers galore on this week’s chain. Notice the perfect 61.8% retracement hold that prefaced the reversal:
- Z: very mature falling wedge… would love to see empty/reclaim action around the 61.8% retracement level and that LVN:
- Natural Gas: This balance is maturing significantly. Notice Volume Profile’s confirmation of the drawing. This is a type of chart I almost always see in the context of “Bottoming” ideas. The 3 Questions help us clarify our thinking here and make sure we don’t get caught on the wrong side of trade. Conviction on ALL relevant time frames is down. This is technically a continuation pattern. Additionally, the active fib is a bearish 61.8% retracement etc and we are BELOW the VPOC of balance = sellers in control.
- USD/JPY absolutely classic retest, watching for continued upside:
- CRM: one or two more days down and I’d love to start into this:
- GPRO: lower time frame balance and consolidating gains from a solid trend:
- US Dollar Index: VERY critical reference point here, trying to chew through an HVN and a 61.8% retracement level. If it can get through, this becomes very bullish:
- FSLR: ferocious falling wedge breakout, will watch for lower time-frame patterns of acceptance:
- GOGO: see how the apex of this falling wedge coincides with the 61.8% Fib retracement level which is ALSO just above composite VPOC? Would love to see price get there.
Updates
- Copper: In May there was a setup in Copper that I was tracking very closely but ultimately missed. I am going to include it here not only in order to show the incredible follow-through this setup received, but as an illustration of the transition process between Price Acceptance and Price Discovery in general. The risk/reward offered by this trade location was outstanding, and one could have made a very handsome sum with only a few contracts short.
This is a five year weekly chart of copper. Copper built a balance at the location I have designated with an arrow, which was a confluence of a five-year-old downtrend line, a 61.8% retracement level from the previous swing high, and structure (previous support). Confluences like this are a high-conviction setup for me. You can see how well the setup worked, and that it resulted in 52-week lows for Copper. What happened on the lower time frame at this reference point was additionally compelling. Here is the balance that Copper built at that key area: 
My first post discussed how Fibonacci applications can help us identify the transitions between Price Acceptance and Price Discovery, because a range is characterized, by definition, by directional moves being repeatedly and deeply retraced, while a trend is characterized, by definition, by directional moves being only shallowly retraced before being continued. Dialing down into this balance, we see that copper signaled a 61.8% retracement from the last probe of the range high… 
… which followed through to the range low. The ensuing bounce couldn’t even retrace farther than the 38.2%…
…and eventually led to Copper breaking down in a violent and lasting fashion.
- Crude oil did a strikingly similar thing as its May-June pattern of contraction started to deteriorate and break down (this is a chart of the back-adjusted contract). You’ll remember me highlighting the balance I’ve marked below with an arrow in my last post:
Let’s dial this down to the lower time-frame and scrutinize the transition from range to resumption of downtrend. Here’s a look at the anatomy of the balance:
As I mentioned in my first post, balances can almost always be drawn as EITHER a contraction (the wedge) or using rigid horizontal support and resistance lines (the box). That’s very clear here. (As a side note, notice the larger range’s lows were a double retest of the apex of the previous, smaller pattern of contraction). As this balance matured and tightened, Fibonacci applications gave clues that a trend had been born. A 38.2% from the range high…
… that was also a 61.8% from the last session high…
… catalyzed a swift breakdown, and then ANOTHER 61.8% retracement drawn from that same high… 
… which was ALSO a 50% retracement drawn from the original high…
… finished her off. As you can see on the continuous contract’s daily chart, Crude went on to make new lows.
These examples in Copper and Crude illustrate a very important property of the transition process between Price Acceptance and Price discovery, a dynamic that is at the heart of why I am an anticipatory trader, rather than a confirmation trader:
Trends are often born NOT from the “breakout” of a range, but from the last probe of (or initiative attempt out of) the OPPOSITE side of the range from the trend. In other words, if you trace “Discovery”-type price action (swift, shallowly retraced, directional spikes) to its beginning, you will often find that it in fact began all the way at the opposite side of the Acceptance range. You may have heard the old trading adage, “From failed moves come fast moves,” which describes this dynamic perfectly. As I stated in my first post, “The biggest moves in ONE direction are often caused by an initiative attempt in the OTHER direction that is met with a much more powerful responsive effort.”
More updates:
- EUR/USD: This balance continues to mature, although she is trading quite soggily and flirting with a breakdown:
Fibs are very much in play here, with the active ones being a bullish 61.8% retracement level that coincides with the range low…
… and a bearish 50% retracement level enforcing the recent swing highs (notice how well the 61.8% retracement was also respected): 
- BZH: In my last post I noted the maturity of this contraction and the fact that the active Fib is a bearish 61.8% level. Look at the follow through that level received by sellers! Amazing. It will be up to responsive buyers at the lower end of the range to save this from an initiative attempt LOWER:
- WDAY: still love how this is setting up. Basing the gains made by the pop off of the bullish 61.8% Fib level (and notice the subsequent weekly candle’s pop up from VPOC), but this is still Bear Trend Fib vs. Bull Trend Fib:
