How to Look at Symmetry

 | Aug 08, 2014 | 9:00 AM EDT  | Comments
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Stock quotes in this article:

aapl

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uso

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QQQ

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cost

There is one thing that I observe every day in every timeframe in the markets. It is what I like to call symmetry. My definition of symmetry is similarity or equality when comparing swings in the same direction. I look for symmetry all the time on the price axis of the market, but I will also look for this symmetry on the time axis, as it also shows up there.

Symmetry on the price axis of the market may also be called a "measured move" by other technicians. I look at symmetry in the context of corrective moves and trending moves, as I find that many swings on a particular chart tend to be similar to others on that same chart. Let's look at some examples of this and how it can help us define risk in the marketplace. 

I use symmetry projections most often when comparing corrective swings within a trend. Along with other Fibonacci price relationships, these projections help me define areas where we can re-enter a market in the direction of the trend by comparing a current move with any of the prior corrective moves. In this first example, we are looking at a chart of Apple (AAPL). Note that the three swings I have labeled on the chart were all similar. They were $5.08, $5.38 and $5.40. Projecting 100% of these prior swings gave me an area to focus on for a buy entry in AAPL in late June. So comparing corrective swings is the first way I use this tool. 

Apple (AAPL)
Source: Dynamic Trader

I will also use symmetry projections to tell me when it might be time to exit a position.  When symmetry projections hold, I expect a trend to continue in the same degree. When these same projections are violated, it suggests at least a deeper correction, and sometimes a full trend change. This is why there are times that I will place a trailing stop above or below these symmetry projections. Let's look at an example of this on a  30-minute chart of United States Oil (USO). We had been trading the long side of this one from a daily time/price low, but wanted to use a trailing stop as we don't always make our targets on these trade setups and we want to protect ourselves. Notice that the prior corrections in the last uptrending swing were $0.37, $0.24 and $0.30. If the same degree of trend was going to continue, I wanted USO to hold above the projections of these prior declines ($37.93-$38.06). When it failed to do so, I suggested it was time to exit the long side. In this case, we saw a full trend change after the break in the symmetry. 

United States Oil (USO)
Source: Dynamic Trader

I will also measure swings in the direction of the trend to look for possible support or resistance decisions. Let's take a look at a daily chart of PowerShares QQQ (QQQ) for an example of this. On this chart I measured 100% of a prior rally swing in the Qs, which lasted $3.97. I compared this swing to the swing we were looking at from the July 10 low. This projection gave us possible resistance to the rally at $97.60. This projection also just happened to overlap the 1.618 extension of the prior swing illustrated in green on the chart below. That came in at $97.52. The actual recent high in the Qs was made at $97.51 before a healthy decline ensued. Remember that I never like to step in front of the freight train, but once you started seeing sell triggers after a failure to clear this resistance, it gave you reason to both exit longs and also consider the short side for at least a trade. 

PowerShares QQQ (QQQ)
Source: Dynamic Trader

For today I have one last illustration on how I use symmetry on the time axis of the market. If you look at the daily chart of Costco (COST) below, I have labeled where we saw symmetrical swings in TIME that were 16-18 trading days. You can use this information a couple of different ways. First, you know you can look for a possible change in trend if you are close to a 16-18 day swing on this chart, since we have seen this in the past. In this case, I was comparing the time of the corrective declines. The time symmetry by itself can give you a heads-up as to a possible change in trend in the market. The second way I would look at this is that after we put in a tradable low at 16 days down on 12/18/2013, that low defined my risk on any long trades. Stops on long positions could be placed below there, since this low would be defined as pivotal just due to the symmetry in time. This one simple, yet powerful technique has quite a few uses in my technical analysis arena. 

Costco (COST)
Source: Dynamic Trader

I hope this gives you some ideas of how to look at symmetry in the market. I will be expanding on symmetry projections on the higher timeframe charts during Chart Week, aka Chartnado on Friday 8/8. Tune in to Mad Money for that! 

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