Two Tactics For Trading “Off the Chart”

Oil's sustained rise over the last six months has created an interesting dilemma for many traders. It has taken WTI, for example, to levels not seen since April of 2015, so for those looking at a 1-year chart prices are quite literally "off the charts". Most traders, myself included, use recent levels of support and resistance to plot both entry and exit points for trades, at least to some extent, so off the chart pricing is problematic. You could go back to that 2015 action, but time decreases the relevance of chart levels, so for short-term trades that is not helpful. What, then, is a poor trader to do?

First, you need to understand the nature of chart levels and what makes them significant. When you detach yourself from a trading mentality and think about it, there should be no reason why what happened around a particular price point in the past will influence what happens in the present…except for one thing. Support and resistance levels are self-fulfilling prophecies. The significance of those levels rests in the fact that enough people believe they have significance. What stops a move down is the appearance of buyers, or sellers in the case of a move up, and past action at a certain level attracts new entrants into the market. So, in effect, support, resistance and pivot levels matter because they matter.

The trick to off the chart trading, therefore is to identify other things that potential buyers and sellers may regard as significant, absent their normal cues. In my experience, the two most reliable levels in that situation are round numbers, and Fibonacci extensions.

Under normal circumstances round numbers are significant only as a distraction. I can assure you that in dealing rooms they are regarded as "mug bait", levels that attract the amateurs and can be used to squeeze those less experienced in trading than yourself. Once you are off the charts, however, they matter.

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The chart above for the E-Mini WTI Futures contract, QM, shows clearly that we are now above the 52-week high and so without any refence points when trying to plot where resistance may come. Look at the beginning of the chart, though, and you will see that $55 proved to be the top when that too was off a 1-year chart to that point which showed oil's bounce from the low in early 2016. On that basis, it is only reasonable to expect some resistance around the next round number, $60. If nothing else, that provides a logical level at which producers are likely to sell as a hedge.

Fibonacci extensions are somewhat more complex, and decidedly more wonkish. They are based on the mathematical sequence named for a 12th Century Italian mathematician where the next number is arrived at by adding the last two numbers, so it begins 0,1,1,2,3,5,8,13…and continues ad infinitum. The relationship between the numbers in the sequence is used to derive certain percentages that are deemed to have significance.

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Fibonacci extensions are simply a way of plotting the relevant percentages of a move into the future. If you use the June low as the bottom of this move and last week's 59.05 as the top, as I did in the above example, the first significant level is 23.6% above the top, at $63.025. That, therefore, would be another level that could provide resistance, and even prove to be a turning point in WTI's fortunes.

Again, if you look at that as just so much hokum, you are missing the point. Experienced traders everywhere are aware of Fibonacci levels if nothing else. In an off the chart situation where more conventional reads of support and resistance are unavailable, they will, therefore attract enough sellers to begin the process of forming a resistance point. That is what matters.

It should be pointed out that none of these levels should be taken as exact. Momentum is a powerful thing, so if you do use them you have to allow for some degree of breakout initially when setting stop loss orders. In addition, always remember that they will not matter at all if there is a major shift in the fundamental supply or demand outlook. They are, however, a starting point when other data are scarce and as such are useful things when prices are truly off the chart.