Symmetry in Pullbacks
In today's free video I wanted to talk about a couple of things that can really help you from a swing trading strategy perspective in determining whether or not a chart is just having a reversion to the mean or if there's a bigger break going on.
For this example I really just want to look at the clean price action. But a lot of times you'll say how far back do I need to go to determine how much symmetry I need to measure? Because, obviously, if we're going to say that this has been a bullish trend for Starbucks (SBUX) from you know, way back here in February, you don't want to spend time running every single decline inside that.
Look at the 5 and 13 EMAs
So what I'll do is just look at the relationship between the 5 and the 13 moving average and these are exponential. So we'll drag this down kind of zoom in on the price action itself. And you can see that essentially throughout this bullish run you know, right here we had a little bit of a falter. I would still include that. But then if you come back and look at it here, you know this cluster is essentially kind of towards the end of August and the start of September, was really when we started to make that run. That's when the 5 and 13 get nicely above each other and those are the pullbacks you want to measure.
From there we're going to come back -- and we know that that's right there at the end of August -- we hide these studies. And then you're going to grab the Fibonacci extension tool. From this kind of cluster area we want to start looking at these corrected declines. So we take the high to low here. I'm just going to run these kind of quickly to give you the idea. You run these from the high that was made -- this could be the all time high, in which case this high was 82 half and this high is 82.37, so you do want to use that level. So this obviously was a bigger swing. But if you take in to account some of the smaller ones and run those from that level as well, you just see the importance of when this trend was taken out what it does to the chart. These are all minor levels but it gives us the idea of what we're looking for.
So if we're going to say that since the 5 and 13 crossed over all of these corrected rallies have been a certain point value. Well then when you gap down through this, this is a key shift in that because the declines that led up into it have been exceeded. This just means you know, Starbucks had a pattern of pulling back you know, of 2, 3 dollars that was all relatively mild and the trend was still good. Well then here we've pulled back from 82 half to down to 75 and that's a shift in trend. You know that's when we talked about this -- when it happened we said, OK, maybe you take a stop on this because you're trying to play the squeeze to the long side and right up until it breaks it looks OK. OK, so maybe you take a stop on that. But at least you know that you should not be coming back in here and trying to buy it again, because key daily symmetry has been violated.
Then if you compare that to something like DDD it's a very different story, because you can do the same thing. You look, OK here is the 5 and 13 that crossed through each other that essentially happened once the squeeze could fire long. So we'll hide our studies and then looking at these various corrections, I said I'm only taking in to account pretty much three swings here. But you can see how this corrective decline obviously was very large and that's going to give you a symmetry much lower. So not really at a decision point yet but maybe it will be in the future. But then these smaller declines right here measured from the high we put in on Friday, takes you right down into that key zone of support. So this chart is still doing perfectly fine because the symmetry is also doing very good. Now if you did break below 80.73 that would be a big violation of daily symmetry and you know you need to step back and DDD is going to be a much more cautious buy. So, like I said, symmetry is very simple but the more you get used to running it and actually using it within your work I think it will be a very useful tool and hopefully that helps.
Now one other thing that I want to make you guys aware of is that on Thursday, January 9th, so that is the Thursday that is this week, we're going to be having our webinar on The Voo Doo lines. So, obviously, these have been very important in my trading and a great addition to the things that I like to follow throughout the day and they work really well. If you haven't had a chance to check them out this will be a great night to get up to speed on them and I hope to see you guys there.