Price Action and the Dow 30

[Blue Ruin]

Part of my daily routine involves scanning the Dow 30 for potential setups. As a way of cataloguing this in a more structured manner I’ve decided to start a journal and post my findings here for the benefit of others that are interested.

My method is simple: to look for price action at key levels.

What qualifies as a KEY level? A significant support/resistance zone, preferably with Fibonacci confluence. If there is no confluence then the S/R level must be a significant historical PIVOT.

I am NOT offering anything new to the method itself. If anyone is unfamiliar with this method I implore you to read Trader Dante’s quite brilliant thread.

That thread has helped my trading progress in leaps and bounds, and I owe TD a huge debt of gratitude.


Another thread I must make mention of is that of Mr Charts who I defer to as one of the top US stock traders on these boards. This thread will, however, differ from his in two ways:

Firstly, Mr Charts tends to cast a much broader net when looking at stock whereas I will look almost exclusively at the 30 components of the Dow and the companies knocking at the door. This is mainly because I’m more comfortable trading high liquidity stocks.

Secondly, and most importantly, I predominantly look at the longer timeframes. I look only at the DAILY and WEEKLY when doing my daily scan of the stocks. When the price moves into a key area, I will sometimes also look at the 4 HOUR and HOURLY timeframes to look for price action.

I never look short of the hourly. This isn’t because the method doesn’t work on the shorter timeframes, but because I don’t have the time. I trade part-time, and mainly trade currencies. I don’t have time to check these stocks every hour, but I will check the stocks that have moved into key areas at least every 4 hours.
Those looking at daytrading US stocks should check out Mr Charts' thread.


This thread’s purpose is threefold:
1. To help my own trading by marshalling my thoughts, increasing accountability and thereby discipline.
2. To help others and myself by cutting down research time, much the same way as the Potential Setups thread does.
3. To spark debate and continue learning.


With all this is mind, I welcome you all to this thread, newbies and veterans alike, and hope we can leave any negativity at the door. I will reiterate though that newbies who haven’t read TD’s thread do so, that way we don’t have to reinvent the wheel.
Newbies should also check out this thread which serves as a beginner’s guide to potential setups looking mainly at currencies.

 

[Blue Ruin]

KEY LEVELS

How important are these mythical levels when it comes to the DOW 30?

The charts below tell a story.

Chart 1 is Home Depot (HD). The key areas are clear. The upper range in particular – this is as far out as I can zoom the daily chart but if you were to scroll left you would see these levels have been key pivots back as far as 1999 (and possibly further but that’s where my data stops).
I wouldn’t zoom in at all until the price was close to the 25.00 level. Once it was near I’d look for either a REJECTION of this level, or a BREAK of this level followed by a retest from the other side. The rejection or break/retest can take the form of daily price action, or 4 hourly price action , or hourly price action.

Chart 2 is Wal-Mart (WMT). Again, the levels are fairly obvious. A large range stretching back to 1999. A pivot has developed within the large range giving us a very important level to watch. The price is currently at that level so I am watching it closely for price action.

 

[Blue Ruin]

PRICE ACTION

These charts show examples of the price action I’m looking for.

Chart 1 is Pfizer (PFE). The 4 hourly pin bar is off a pivot zone with 50 fib confluence. It is also off a psychologically significant number.

Chart 2 is Verizon (VZ). Daily pin on a retest of previous resistance. On the initial breakout there is no clear price action entry, at least on the daily, so I would have put the chart to one side and waited for it to come back to that level from above. This happens often enough for me to be confident it will happen here. Patience is the key. In this case it took 3 months to return and retest.

 

[Blue Ruin]

CHARTS ON MY ALERT LIST

The thing I’d like to concentrate on in this thread is drawing attention to stocks whose prices are approaching key levels. From there people can watch them for price action, discuss the price action here, and make their own decisions on whether to trade.

Here are 2 stocks I am watching closely.

Caterpillar (CAT). Along with the 38 fib, that resistance line has been in play intermittently since the mid 90s.

IBM (IBM). Approaching a very strong historical pivot level that is also the 50 fib retrace. It is also the psychologically important 100 level. Would be very surprised if the price didn’t react in some way when it reached this area. Whether there will be qualifying price action to act upon is another story.

 

[Blue Ruin]

Another chart to look at.

McDonalds (MCD).

Chart 1 is the daily, zoomed out sufficiently to see the clear range as well as the minor pivot within that range.

The support at just above 50 acted as a pivot in 2007 when the price first broke into this range, and corresponds with a top right back in 1999. Thus, it's an historically significant level that has been in play for 10 years, and the price continues to react to it.


Chart 2 is zoomed in on the hourly to look at the most recent tests of the lower support.

Both these pinbars are playable. The first isn't a great pin, the body being below the left eye, however given the significance of this level and the R:R you could be forgiven for going for it.

The second pin I think is ideal.

 

[Blue Ruin]

IBM

This has arrived at the 100 level I mentioned in a previous post. The daily chart shows a small rejection of this level, but the price action isn't strong enough to tempt me.

However, I am quite conservative when it comes to trading the Dow 30. I make most of my money on currencies - on stocks I wait for perfect setups at rock-solid levels.

For a more aggressive trader, this 100 level on IBM could conceivably be traded on its merits alone. This level has had a hugely strong influence on the price as far back as 1999.

At the very least, I expect this level to spark a temporary pullback as the price trends up, and if it breaks through I would be VERY surprised if it doesn't test this level from the other side.

I'll be watching for a better entry.

 

[advfntrader]

do you use similar mehtods for currencies ? 4hr and Daily ?

 

[Blue Ruin]

do you use similar mehtods for currencies ? 4hr and Daily ?

Absolutely, though I'll also pay more attention to the hourly as currencies are where I spend most of my time and where I'm most comfortable. Also, stocks at the moment are very volatile and by limiting myself to mainly the 4 hour and daily I can cut out most of the intraday noise.

With currencies I'll still watch only the 4 hour and daily until they approach a level I'm interested in. Then their priority goes up and I check them every hour.

 

[Blue Ruin]

A few interesting things to look at today. First up:

Verizon (VZ)

Chart 1: a strong rejection of the level I've highlighted on the 4 hour chart.

Chart 2 is the big picture. As you can see the level it has rejected is important historically.

This is a setup I will probably trade. However, I will wait for the US open and watch what the price does. I will wait for confirmation which will be a break of the pin high.

If the price moves more than 50% down the pin I will consider it invalid and wait for another spot. If it gaps significantly I'll need to wait and let the price settle.

I think it's a good setup but not fantastic as it was the last pin of the day and therefore vulnerable to overnight shenanigans.

 

[Blue Ruin]

Next up:

Hewlett Packard (HPQ)

A very similar setup to above. We are looking at a breakout of a key level followed by a return and retest of that level from the other side. See chart 1.

This is arguably stronger than the VZ trade as below the level there is a possible head and shoulders pattern.

The pivot line is historically significant, and at a psychologically key level too. (Chart 2)

Again, need to wait for open and judge it from there.

 

[Blue Ruin]

The VZ pin was invalidated within 5 mins of NY open. HPQ gapped up enormously, which is always likely to ruin your plans when your signal is the last pin of the day.

Nothing entered. Will keep an eye out for something else.

 

[Blue Ruin]

Wal-Mart (WMT)

Price has returned to test this key pivot after breaking through last week. Chart 1 shows the daily - not fantastic price action but given the strength of this level I think it passes muster.

See chart 2 for a big picture view of why I consider this level so strong.

I'll look to enter on the break of the daily bar to the upside. Stop will be under the bar.

Price may gap up at open so I'll have to watch carefully. Not hugely experienced trading stocks, especially in such a volatile market. I guess there are ways of avoiding the problem of missing entries due to gapping. I could have entered the trade last night just before close but I like to wait for the price action bar to activate.

If you look at chart 3, the 4 hour, you'll see that yesterday offered another entry. I had a buy limit in above the first bar but it didn't activate. In this case it saved me a loss.

 

[Blue Ruin]

Ok, so I forgot about golf.

Anyway, set up a buy limit before I left at 5220. Stop at 5089.

While I was away it went up, activate the pin and my order, then shot down to 5100.

Trade still running. Currently 5164.

Not entirely happy, but to be fair I would have done this manually if I had been in front of the computer. (And I hit a sub 90 round for the first time so I couldn't really care less if this trade goes against me.)

Good chance the price hasn't found the support it needs yet. Likely to be closer to 5000. Anyway, we'll see how it runs. If it stops out then I'll look for a better entry.

 

[Blue Ruin]

As you can see, there is clear support here. Still, entry might be too far from the psychological 5000.

 

[Joey25]

Great journal and very informative.

I don't know if you have a job as well, but I think golf is a great hobby to have for position traders!

 

[Blue Ruin]

Great journal and very informative.

I don't know if you have a job as well, but I think golf is a great hobby to have for position traders!

So true. My trading is at its best when I have no access to the market.

 

[leovirgo]

Great thread! Are you in on WMT already?

 

[Blue Ruin]

Great thread! Are you in on WMT already?

Cheers Leo.

I'm long WMT from 5220 using Monday's daily. Thankfully I put my stop under 5100 and avoided yesterday's bounce.

I'm noticing psychological levels seem to have a much greater influence on price in these equities than they do in the markets I usually trade, like forex. I'd have put my stop under 5000 if I could have but the stop size was just outside my risk profile.

If it does test 5000 then that's fine. I'm happy to have more than one shot at catching a move north.

 

[leovirgo]

Cheers Leo.

I'm long WMT from 5220 using Monday's daily. Thankfully I put my stop under 5100 and avoided yesterday's bounce.

I'm noticing psychological levels seem to have a much greater influence on price in these equities than they do in the markets I usually trade, like forex. I'd have put my stop under 5000 if I could have but the stop size was just outside my risk profile.

If it does test 5000 then that's fine. I'm happy to have more than one shot at catching a move north.

Cheers Blue Ruin. I am in too at 5212. My stop is around 51 as I am using a H1 as entry TF.

 

[Blue Ruin]

WMT

Looking strong along with the rest of the market. Currently up roughly 220 points from entry.

5500 is a possible problem area and it will be interesting to see how the price reacts to it, particularly with this momentum behind it.

Stop stays where it is below the entry candle. I won't move it until I see a solid break of 5500 and/or a new range. Once I see some consolidation a bit higher I see a logical place for the stop being under 5300.

The merest sniff of volatility and this stock can easily whipsaw a daily range of 400. I'd like to be in this at least to the 6000 mark, if not the top of the longterm range at 6400, so trade management will be the key.

I'm not ruling out a return to 5100. If it does, I'll look to add on the appropriate price action.