Since it seems picking S/R is as much the key to trading as anything else, I figured I would share my thought process behind it in foresight. For right or wrong, its just what I do. Plus it helps me to write down all the basic stuff so I don't get too complicated and stay grounded in what I'm doing.
I mentioned I didn't have any levels up here, well I'm about to and here's why:
The first thing I do is start big. The big chart is a 30KCVB chart. Then just pick the obvious stuff. What's that? Well for 2 days price hasn't been able to break the area from 35-38ish. This area has caused some major retracements in the overall all uptrend of the past few weeks. Price touched A, the dropped 15 points. Touched B, dropped 13 points, touched C and so far has dropped 10 points. Thats what I mean about the obvious stuff. Now we can safely say that this 3 point area is major R. Duh, right? But for all the complicated stuff I see about trading it seems like people overlook this simple process. Or they write 90 pages about it so it becomes no longer simple.
Anyways for me 3 points is too big of an area. I need it to be more specific. So for that I zoom in on each test respectively using a 5 sec chart w/volume. The first test (A) we see R is at 1035 pretty much exactly. The next test though is more tricky. Price makes it all the way to 1038. But looking at this test and the volume we can see that this was likley just a volatility spike. 20,000 contracts in 10 seconds is a lot, even for ES. There was no real interest at 38 and likely no real value built between 35 and 38 at all. But price DID manage to get back up to 37, if only for a minute. To me this isn't enough time to build any real value above 35, but we really don't have to speculate because we have another test to look at in test C. In this test we can see that selling pressure kicked in right around 35, like the first test. Price managed to push up to 35.75 on the high vol bar.This reaffirms what we thought originally, that the B test up to 38 didn't manage to build any acceptance past 35.75 even though price made it to 38. So for me, I would put my R line at 35.50, but we aren't done yet. When price makes it back up here we don't have to short blindly, we can wait for the vol to kick in again and confirm for us where R is (which will likely happen right where we expect it to, but its just more confluence), but hey if it doesn't happen until 37, thats ok too. If we can get a short in there then we have just shorted R. It's worth noting that none of this has any bearing on whether the R will hold or not, but who cares? If it does hold we see the kind of move it can give us and since we hopefully have R pegged we don't need that big of a stop. All we have to do is hold our winners. If price does blow through the R, we still have the flip to play
NO we could have started to play this R level after the first test, or we could have after the second. Or we could wait for more tests. Really thats up to you, I chose to wait it out, but thats just me and what I did this time.
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