Today’s NinjaTrader and Mr. Top Step Chart of the Day was submitted by Gerry Reynaud of Trader Makers using free tools available within NinjaTrader and comprehensive data provided by Kinetick. Gerry writes:
One of the best things I learned from my coach in my early trading was to always look for confirmation when planning a trade. The way he put it: “3 Legs of a Chair” is sufficient, meaning to always be able to name 3 reasons in your favor in order to support your decision. This metaphor relates to the fact that just like any chair would not be able to stand on one or two legs, three –in fact– would be enough to support any weight in the absence of a fourth one.
This time, we are looking at a chart of the S&P500 from late 2012 where we can connect a few interesting dots coming up with “3 Legged” scenarios. The hottest topic out here is, where is this over-heated market heading? It all points to a very reasonable (and healthy correction). Yesterday (5/26/13) it stalled at the falling 10MA, meeting the 50MA (death cross) with a bearish engulfing candle –3 reasons suggesting a reversal. Looking down the time line, I have spotted two other important places of support; yep you guessed it right with “3 Legs of a Chair”. The first one is where the green arrow is at 1555. The price could potentially meet the previous down falling trend line for the first time, support from late June and the rising 200MA (3 reasons for a possible bounce). But in the bigger picture, that would only make it down to a 40 fib from last November. The odds point that way and it could be an interesting level to watch for. If that level doesn’t hold, I am most interested in the next one where I placed the red diamond. Let’s take a look, price would meet the back of the down trend line for a second instance, also meeting the rising longer term trend line (from 6/12), and confirming support from previous resistance in Sept ’12. Once again, “3 Legs of a Chair” at 1480. But notice that at that point in time the market would have then corrected to a 61.8 fib level which puts the icing on the cake (making it the 4th Leg of the Chair) for a more convincing correction and a stronger potential rally.
While these levels have strong odds (3 reasons) to go to and to hold, the market will have to produce lower lows. What does that mean? Opportunities to sell the rallies. Always stay with the trend and use 3 reasons to confirm your trades.
Keep in mind that these are only assumptions based on where price has been and where history tends to repeat itself.
Gerard P. Reynaud | TraderMakers
www.tradermakers.com | www.followthehusky.blogspot.com”