“The Out-There As Seen By The In-Here” = Trading Success?

“You do not trade the markets……Instead, you trade your beliefs about the markets” (Van Tharp, “Your Beliefs About Trading”). To that I’d add, the extent to which our beliefs align with reality is the extent to which we’ll be successful.

Let me illustrate what I mean.

I believe that as a discretionary rule-based trader, my METHOD is best served when supported by universal trading principles – ideas that bridge time and idiosyncrasies of individual markets.  For example, Wyckoff’s “Law of Effort and Result” (see the “Laws of Wyckoff“) applies to all markets irrespective of their individual characteristics. And where the Law seems not to be in effect, the Principle of Negative Development applies.

Negative Development states: “If the market ought to do something and doesn’t, that is information for taking the opposite action”.

Do our beliefs have to be true? I don’t know. I only know that they need to serve me – in trading that means allow me to make a profit when consistently applied.

The US indices serve a great illustration of these principles. I’ll be using the NASDAQ as my index of choice.

The chart below is the cash chart of the NASDAQ.

Note the bar, Wednesday, Nov 14. On that day, the range was below normal but yet we saw normal volume.  That suggests that buyers are providing a floor. This idea is reinforced on:

• Nov 15. On this day, the NASDAQ gapped down and rallied all day. By day’s end, we saw normal volume and range.
• Nov 16. On this day, the NASDAQ attempts to see off for most of the day, only to rally by day’s end.

To this picture, add the price action on the NASDAQ CFD (24-hour market)

If the NASDAQ is in a trading range (7,701.40 – 6282.60),  we’d normally expect to see a bounce from the Primary Buy Zone.  But occasionally,  we see a move up to the Primary Sell Zone from the 78.6%.

We saw such a move on Oct 29. The only drawback was the NASDAQ’s failure to reach the Value Area High-Area High 7318.32 before turning down. I saw that only as an amber light warning that the index was not as strong as it may have been first assumed.

Based on the above, I was looking for a rally on Monday, Nov 19.

Instead, we saw a strong sell-off, a sell-off signalled by the 4-Index system. This is Negative Divergence.

The price action on Monday suggested more downside – we saw that today.

The NASDAQ is now at the Primary Buy Zone, how likely an 18-day swing magnitude rally?

Normally after two strong down days, I’d expect to see at least a 1-day rally in today’s (Nov 21) trading. The 30-min chart below suggests that the rally is on the cards. I’ll be looking for confirmation at today’s open.

The quality of the rally (if we see one) will provide preliminary clues to say if the Primary Buy Zone will hold.

(The vertical lines mark the day session price action)