Day traders, beware of false reversals that retrace 50% of the day’s range. There is a reason that markets often retrace 50%; it is because this always takes the market back to an equilibrium point. It also often takes the market back to the vicinity of the opening price, which is the benchmark for the day.

Today (July 14, 2005) was a good example. We hit a 50% retrace of 4.50 up on the ES after a decline of 9 points, which saw support when the gap was filled.

The important issue to watch out for in markets is that we have an abundance of traders making decisions using a geometric approach, à la Gann and Elliott. These guys place orders at what the professional traders term “critical levels”.

I should tell you, first of all, that, in any trending move, for it to continue, it should never overbalance prior corrections.

Today, when we made the 50% retrace to the day’s range, the previous correction had been 4.75, and the 50% was 4.50 up. The other important thing that occurred was that, in Elliott terms, we came up in an ABC with legs of +3.50, -2.50 and +3.50 (equal legs in A and C).

The geometric configuration was perfect for a reversal. So, what happened? Nothing any of my students didn’t expect! The market reversed on the exact tick.

Just look and ponder on why it did that.

If you do not understand why markets do the things they do and trade purely by chance, it is time to do some study and find out how to monitor the inner workings of the market day.

You will be amazed at the dividends it will pay and the unbelievable power of technical analysis as the market swings backward and forward between implied resistance and support.