Think back to the first time you saw a price chart. The price bars probably looked like a disharmonious, incongruous mess. But after careful observation and study, the ink-blot of lines have probably taken on a structure that reveal patterns, the trend, possible price direction and a trading edge.
Markets can also exhibit an uncanny harmony -- symmetry -- where rallies extend similar distances that you can put to use to determine turning points. Symmetry in markets is not confined to any single market: it can be observed with regularity across different markets. Let's look at two examples of symmetrical action in disparate markets that you might be able to put to use this week.
In symmetrical price action, we're looking for markets to rally (or decline) by the same amount as a previous rally (or decline). Markets often exhibit a kind of memory where they rally (or correct) by an equivalent point value to a previous move -- then reverse. Such moves where previous price ranges are repeated are often referred to as
(USU2:CBOT). See how in the following chart the bonds rallied 5 22/32 between December and February (points A and B). Bonds then dropped to contract lows. Then between March 15 and May 1, Sept. T-bonds rallied a symmetrical 5 21/32 (points C and D) before correcting for 50% of the rally.
T-bonds have continued to defy gravity, rallying to a seven-month high, as stocks decline on geopolitical concern and on the hunch that the
won't raise short rates as soon as previously believed. Wednesday June 19, T-bonds rallied and closed a tick off their highs at 104 11/32, again 5 21/32 above the March 14 swing low. Here we have another incidence of market symmetry that could again act as resistance.
Wednesday's 104 12/32 high also coincides with the 261.8%
of the swing denoted by points E and F in the next chart. Price extensions occur when the range of a previous swing is expanded by a specific Fibonacci ratio. They are another tool in the Fibonacci arsenal that can assist in determining resistance (or support) levels when markets break to new highs (or lows), especially when they and other key moves congregate or "cluster" at the same level. In the case of Treasury bonds, a fourth potential resistance level resides at the 127.2% extension of the Feb. 22 to March 15 swing, at 104 18/32.
Altogether, we have two price extensions and two symmetrical price projections, making for a coincidence or cluster of four levels, which suggests resistance. A clustering of four such technical levels can provide significant resistance and a deep correction.
Note that this is a highly contrarian trade, given the powerful momentum in debt futures, and that T-bonds, notes and bills have been rallying off declines in stocks. But all markets correct and they generally do so at such key technical levels.
The benefit of identifying these key technical levels is that one can test the theory of a market correction with very low risk. We closed at resistance Wednesday, providing the opportunity to short against resistance in the 104 12/32 through 104 18/32 area. If T-bonds rally and close above the cluster of extensions and projections, the short trade is invalidated (and one would be out of this trade with a tight-stop loss).
At the same time, the reward-to-risk profile of this contrarian trade with an eight-tick risk (up to 104 20/32) and 48-tick objective (the initial downside target of 102 28/32 is at the coincidence of the close of the May 14 gap and 38.2% retracement of its recent swing) is six-to-one.
A similar situation in a 60-minute timeframe is developing in July
(CCU2:NYBOT). If cocoa fails to close on an hourly basis higher than 1510, look for this market to retrace to lower ground. Similar to the situation with T-bonds, notice that the prior rallies in the chart below could be providing symmetrical resistance where A-B equals C-E, and C-D equals F-G.
You also have resistance at the 50-period moving average and an exact overlap of the 38.2% and 50% retracements of two recent swing highs. Again, there are two price extensions and this time two price retracements, making for four levels that could halt cocoa's advance with a defined risk. Also note this four-cluster area coincides with the 50-period moving average, a fifth potential resistance level.
Marc Dupee is an independent trader and co-author of the book
The Best: Conversations With Top Traders. Dupee was formerly markets analyst and futures editor for TradingMarkets Financial Group. At time of publication, he held no positions in any securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While he cannot provide investment advice or recommendations, he invites you to send your feedback to
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