Trading With DiNapoli LevelsTM

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GENERAL DISCUSSION:

Your success in trading with DiNapoli Levels is dependent upon a comprehensive understanding of what has been taught throughout this book. Your ability to recognize how different Time Frame charts of the same data impact your trading strategy is of the utmost importance. Spend as much time as you require internalizing this subject. The dividends paid will be many.

MOVING THE TIME FRAME

To some of you this will be absurdly obvious. Others among you will really struggle with the visualization of the way Time Frame interacts with DiNapoli Level creation. If you have trouble with this process, it will become clear as you work with graphics software and display the same data in different Time Frame charts.

We'll start very simply. The half hour Chart 11-1A, has an eight price bar up move. The line Chart, 11-1B, shows all the information from the bar chart that we need for D-Level creation. Chart 11-1C shows the proper labeling of Focus and Reaction Numbers for this Market Swing.

A HALF HOUR CHART B LINE CHART C DINAPOLI LEVELS

CHART 11-1

The same (up) price Movement depicted on an hourly-based chart has only four price bars instead of eight, since it takes twice as much time to create each bar. In this process a reaction (number) disappears.

A HOURLY CHART

B LINE CHART

C DINAPOLI LEVELS

CHART 11-2

Both charts are equally accurate for the Time Frame shown. The point is that as you increase the Time Frame:

five minute to hourly daily to weekly weekly to monthly, etc. the number of DiNapoli Levels will likely decrease, because the number of Reaction Points are likely to decrease.

Conversely if you decrease your Time Frame:

monthly to weekly weekly to daily hourly to five minute, etc. you will likely increase the number of DiNapoli Levels.

Let's say you are a daily-based player, but your equipment gives you the ability to collect hourly data (as is the case with an inexpensive delayed feed). You can produce more Fibnodes on an hourly basis than you would otherwise see on the daily chart. You can therefore fine tune entry areas and stop placement points. You can still do your analysis at the end of the day, but with an hourly capability you can create additional Fibnodes from Reaction Numbers that would be buried in the daily action. These additional Fibnodes may create areas of Confluence transparent to higher Time Frame traders.

AN IDEALIZED TRADING EXAMPLE:

Let's try to apply some of the techniques we've learned so far, in an everyday trading situation. We'll assume we've dropped the Time Frame sufficiently to locate a Confluence area, as shown on Chart 11-3. We'll also assume the following criteria regarding Trend. The Stochastic (not shown) has given a "sell" while the MACD (also not shown) remains in the "buy" mode. The Trend therefore remains intact to the up side. Furthermore, for the sake of simplicity, we'll say the Trend will remain intact to the up side, even if price action were to break to the area of Confluence.

The questions: Where would you enter, and where is your stop?

CHART 11-3

Ponder the questions before considering the solutions outlined below. There is more going on here than is obvious. Incidentally, there is more than one correct answer.

Hyper Hank: Joe, I'd sell the market right where it is and take profits at the Confluence area. Then I'dgo long.

This answer is correct only if Hank had the ability to lower his Time Frame sufficiently to observe the Trend on the Market Swing down. Hyper Hank needs a down Trend to justify his sell, and while a lower Time Frame may give an MACD/Stochastic "sell," it's an assumption on Hank's part and beyond the specified criteria. Also, any offset to his short position or any order that would initiate a long position, should not be placed at 'K' Confluence, but rather above Confluence in order to increase his chances of being filled. Hank also did not answer the question fully. He said nothing regarding stop placement. He's so anxious to trade, he doesn't consider protecting himself. My advice would be for Hyper Hank to settle down and regroup1, otherwise he is about to'learn an expensive lesson.

Conservative Carl: Joe, I'dput my buy at the .618 retracement of Reaction 2, andplace a stop beyond the old low at Reaction 2.

This solution assumes the Trend would still be up at the .618 of Reaction 2, and the criteria given, only guaranteed an up Trend to Confluence. If we assume the Trend would remain up at his entry point, I would recommend that Carl:

A. Should put his sell stop at, not below #2 (assuming he has a broker that commands respect in the pit).

B. Should buy above the Primary Node, (which is, as he stated, the .618 retracement of Reaction 2), not on it.

If Conservative Carl had qualified his entry, depending on the Trend remaining intact, this solution would be acceptable, but perhaps overly cautious. The problem with waiting for deep retracements to manifest, is that the context (in this case Trend) may be history at the entry point, and Minesweeper A or B would have to be employed for a proper entry. See Fibonacci Tactics CHAPTER 13.

1 He should reread CHAPTERS 4 & 5 on Trend analysis. There are also a variety of trading psychology sources listed in the bibliography, reference, and appendix sections, which would be of value to him.

Diligent Dan: Joe, I'd enter just above Confluence and depending on my money management criteria, my stop would be below Confluence or below F5 of the Primary Node. Ifl choose the later stop placement criteria, I'd keep my eye on the Trend. If the Trend broke to the down side, I'd exit at the market or calculate the resistance DiNapoli Levels at that point, and take my first opportunity to exit my long, at or below a resistance Node.

Good answer Dan, but you are missing something.

Hyper Hank is back!: I'd put my buy above the first .382 support Node and my stop below Confluence.

That would be my choice as well, but give me a reason. / don't want to miss the move!

Diligent Dan is back!: Hyper's second solution is Joe's preference because there's Agreement between the OP of the down move, and the first .382 retracement area.

CORRECT! See Chart 11-4.

CHART 11-4

You can see from the progression of ideas that there is more than one acceptable answer possible from analysis employing the same methodology.

ADVANCED COMMENTS:

It's probably a little advanced at this point but I'll be more specific about my stop placement.

If the higher Time Frame Trends supported a long entry, (better, safer context than what was given), my initial stop would likely be below the primary .618 '*' Node.

If the higher Time Frame Trends did not support the trade, then my stop would be just below Confluence.

If the trade criteria included a Directional Signal up rather than just a Trend up, I would have entered just above the first .382 Node, even if there were no Agreement, since a Directional Signal is stronger than just a Trend up. I would also buy stop the old high, or the high at C // the Directional Signal were particularly strong (like a Double RePo Failure). If I were filled on both the 'Or Better' buy (at the first .382) as well as the 'buy stop,' that would be fine. I don't mind doubling size on Directional moves.

D-LEVEL™ EXPANSION ANALYSIS & LPOs:

Now let's look at a somewhat more complex set of Market Swings with respect to Fibonacci Expansion Analysis and Logical Profit Objectives , as in Chart 11-5 below.

See if you can locate all profit Objectives on Chart 11-5 before turning the page. As usual, there is more here than meets the eye.

CHART 11-5

HYPER HANK'S SOLUTION:

CHART11-5A

DILIGENT DAN'S SOLUTION:

CHART 11-5B

Dan correctly perceived that I did not specify whether we were long, short, or out. In this type of configuration, there are Objective Points both up and down, depending upon the labeling of the ABC move.

Hank's labeling of Chart 11-5 was correct but incomplete. I have not included these labels on Dan's solution for clarity, but I did include all expansions. If I were to include both labels on this one chart, one set would have been labeled A, B, C (Hank), the next set would have been labeled A', B', C' (Dan). Both resistance Objective Points and support Objective Points were created from the combined labeling.

As Diligent as Dan was, he was not diligent enough. Do you know what's missing? Think about our definition of Logical Profit Objectives before turning the page.

RESISTANCE NODES AS LOGICAL PROFIT OBJECTIVES

CHART 11-5C

SUPPORT NODES AS LOGICAL PROFIT OBJECTIVES

CHART 11-5D

Based on our definition of Logical Profit Objectives, the Fibnode retracement areas should be included, unless these Fibnode retracement areas have been taken out by price. Including these Fibnodes gives you five Logical Profit Objective Points, not three, for a given Market Swing.

In Chart 11-5C, there are two independent Fibonacci Resistance series i.e., two Focus Numbers FRl and FR2, each "owning" one Reaction Point. For clarity, only the Fibnodes for the FRl series are shown. If you think the FR2 series is too small to bother with, consider that I have not labeled the 11-5 series of charts with a Time Frame. I have made them small on purpose. If we are looking at a five minute chart, the Nodes created from the FR2 to 1 wave might be safely ignored, but what if this represented a weekly Time Frame?

Chart 11-5D shows a support Node that will act as a Logical Profit Objective for a position on the short side. The .382 Node has been taken out by price and therefore is not shown. The position of the .618 Node is such that the price is on a LPO right now! Which of the LPOs we take, will depend on the context of the trade and the criteria we established for our original entry2.

Here are some context issues to consider when we determine which profit objective to take.

1. How overbought or oversold are we?

2. Are we in this trade because of a Directional Indicator or a Trend Indicator?

3. Are the higher Time Frame Trends with or against us?

4. Are we about to get a confirmed or unconfirmed Trend signal in a higher time frame that will support our trade?

5. For intraday traders, we want to know how close we are to the end of the day!

6. Was thrust apparent on the A B leg?

7. Are we nearing our stress point? Newer traders are often more comfortable with losses than profits. Ifyou feel undue stress because of the level of profitability, take a close in objective before you act irrationally.

2 Now would be a good time for you to reread the Directional Indicator material in CHAPTER 6 relating to "Bread & Butter."

MORE ON STOP PLACEMENT:

We'll take a look at an up move, to consider more thoroughly stop placement techniques. The same reasoning applies equally to down moves.

DiNapoli Levels can have a significant effect on how you place stops, beyond what has already been discussed. Let's take a look at stop placement behind, against, or in the vicinity of old market highs or lows.

Have you ever considered why, on one occasion the market blows through an old high like gangbusters, and on another, the market holds firmly in the vicinity of, but not necessarily at the old high? Take a look at the following examples.

Due to the small extent of the pull back of the B-C leg, the COP would have been significantly higher than Point B. It therefore would not have presented any resistance in the vicinity of the previous high at B. If you had a stop in the vicinity of B, and it is exceeded, you would have stood a good chance of being hit hard, since there was nothing to stop the market from brisk Movement up.

CHART 11-6

Distribucion Fibonacci Forex

In the situation depicted in Chart 11-7, the protective stop is less likely to be hit, and if it is, your fill is more likely to be reasonable. You not only have some inherent resistance from an old market high, but you also have the additional resistance applied from the COP. This helps the high at B to remain intact.

CHART 11-8

In the situation depicted in Chart 11-8, Point C is slightly higher than a .618 retracement of the same AB up move. Stop placement should account for the location of the COP and be placed above the expansion, not just above the preceding high.

In Chart 11-9 below, we see a variation of the same stop placement criteria shown in the previous charts. In this case, the up leg is forming a COP, just before the previous high, thereby increasing the chances the previous high will hold.

CHART 11-9

This phenomenon is played out in the weekly U.S. Bond Chart 11-10, as the twin tower, all-time highs were formed. COP resistance halted a move to new high ground.

CHART 11-10

Once you become familiar with DiNapoli Levels, you will see a poetry evolve in market moves that is truly fascinating. It's like holding a prism up to white light and seeing the colors of the entire spectrum emerge.

PRESENTATION:

At this point in the book, I think it's fitting to digress a minute and discuss the presentation of the upcoming market examples. This book has been self-published, because I wanted to control the material. If it is accepted as a useful and competent work, I'll be very pleased. If it is not, it won't be because an editor who knows nothing about trading cut the heart out of it. While I have maintained control, such control involves risks.

Presumably, you're studying this book because you want to find out more about my trading techniques, or about the specific topics the book deals with. Up to this point, I've mentioned certain products Coast Investment Software (CIS) offers, primarily as footnotes. That is as it should be.

The safe way to handle the upcoming examples would be to keep the presentation generic. The problem with that approach is that it's not the best method to help you learn, nor is it the best method for me to teach. My work is most efficiently and lucidly taught, if I use the tools I have developed, so that you can see what I'm doing The FibNodes™ program is such a tool. The Proportional Divider previously mentioned is another such tool. These are both products that CIS offers. You can get around the use of these tools if you choose to, but my job of teaching the material and your job of learning the material is made much easier by their inclusion in this book.

The FibNodes program allows the user to represent in a tabular format, the Retracement -and Expansion points we've been talking about. It also allows for identifying characters to be associated with the Nodes it creates so Lineage can be established. This feature bears repeating for two reasons. First, Lineage is a part of the methodology that some of my students tend to ignore - to their regret. Second, if you choose to use a spreadsheet to implement the concept, you need to build a Lineage feature into it. The FibNodes program has other features designed for high intensity data management during the trading experience and has been designed as a high quality trading tool. The next few pages will explain the FibNodes program printouts only to the extent that is necessary for you to most easily understand the way I have developed and use Fibonacci analysis. A list of the FibNodes program features can be found in Appendix F.

FIBNODES™ PRINTOUTS:

For your understanding of the concepts taught in this book, we are utilizing FibNodes software, DOS version 4.32, from which all printouts are generated. The program can handle up to 30 Reaction Numbers. Typical printouts will contain three or four Reaction Numbers. In practice, I seldom use more than 12 per file, since 12 fit conveniently on the monitor and are reasonable to keep track of. Upon entering any Reaction Point, you can enter an identifying character (such as '*') after the last digit of the Reaction Number. This character will be carried through to the Fibnodes associated with the particular Reaction Point you select.

Charts 11-11, 11-12, and 11-13 illustrate the presentation of data in the FibNodes program.

17 Apr 97 13:47:44 Updated: 04/17/1997 .03820.618

Focus Number File C-930 Focus# (High for the swing)

Point Number Support Fib Nodes Point# (Enter highest reaction low first)

CHART 11-11

17 Apr 97 13:47:44 Updated: 04/17/1997 .03820.618

Focus Number File C-930 Focus# (High for the swing)

Point Number Support Fib Nodes Point# (Enter highest reaction low first)

CHART 11-12

17 Apr 97 13:47:44 Updated: 04/17/1997 .03820.618

Focus Number File C-930 Focus# (High for the swing)

Point Number Support Fib Nodes Point# (Enter highest reaction low first)

How Draw Joe Dinapoli Fib

We have an idealized example of a Market Swing, starting at 225, achieving a high, then retracing to 540 and thrusting up to 750. User inputs to the FibNodes™ program are 750, 540T, and 225*. They are shown on the left side of the FibNodes printout. The Focus number 750 is automatically entered for each segment (1 & 2) since Fibnodes within a series are always created from the same Focus Number to each Reaction Number. Box 1 contains the .382 and .618 retracements between the Focus Number and the first Reaction Point. Box 2 contains the .382 and .618 retracements between the Focus Number and the second Reaction Point and so on. Whether the FibNodes file is a support or a resistance file, .382 Nodes will always be shown at the top of the box, while .618 Nodes will be shown at the bottom of the box. This is done for two reasons. First, when you are trading, you want to see the first number which is likely to provide support or resistance in the current market situation. Second, the form of the printout with the top numbers always .382 Nodes and the bottom Nodes .618, allow you to easily and quickly pick out Confluence by comparing top and bottom numbers. If two reactions are close to one another, they will produce Nodes that are numerically close but both Nodes will be on top or both will be on the bottom. Therefore they are not areas of Confluence. I always try to make things as fool proof as possible for my own trading, since stress tends to eat up IQ faster than multi-tasking eats up computer memory.

You can also enter any variety of identifying characters you choose, to indicate the Lineage of a given Reaction Point. 'D' can be used for a daily Reaction Point, 'M' for a major point. Some Reaction Numbers are more significant than others, so the capacity to enter letters for clarification after the Reaction Point, is of substantial analytical value. In our idealized example, Reaction 2 is followed by '*' indicating that it is the primary Reaction Number and T' follows Reaction 1 indicating thrust. These characters are carried through automatically to the associated Fibnodes by the software.

Finally, naming FibNodes™ files is up to the user but the naming convention I use can help you to figure out what any example is illustrating . Odd numbered FibNodes file names are resistance files and even numbered names are support files. You can get other information as well. In our next example, the Dow file is named DJYR02. DJ is the instrument, YR the Time Frame, 02 indicates support. If DA was in the name, instead of YR, it would indicate a Daily file. A five minute FibNodes resistance file of the September S&P would be named SPU051.

SP - S&P 500 U - September 05 - 5 minute 1 - Resistance

DOW EXAMPLE:

In the Dow example, utilizing the high in 1987 at 27363, I placed an asterisk after the 41 Reaction Point, upon entry into the software, since 41 is the primary reaction low, i.e. the depression low occurring, of course, after the 1929 market crash. The low in 1957 was relatively minor, so the small letter 'm' has been inserted to let me know how strong these Fibnodes are likely to be. The low of 777 in 1982 deserves a capital 'M' since it was a major point, the beginning of this incredible bull market. You can see the sharp ascent after the 1080 low up to 2736. Therefore 1080 gets a 'T' for thrust. Thrust Reaction Numbers are extremely important, for a variety of reasons. The FibNodes printout below details Fibnode support and shows a clear area of Confluence between the Thrust Fibnode at 1712 and the Primary F3 Fibnode at 1707. Those ofyou who were around and trading during the nearly 1000 points in four day crash and 500 point single day decline, know just how gut-wrenching this experience was. We had a negative premium of thousands of points in the S&P cash to futures spread, with no end in sight and suddenly all this was stopped dead in its tracks at 1706.90, by precalculated Fibnode Confluence support!

THIS WAS NOT AN ACCIDENT!

CHART 11-14

3 The Dow values used in this example arc the actual print value, not the averaged (mythical) high and low theoretical values, as published in some financial newspapers.

22 Apr 97 15:27:24 Updated: 04/22/1997 0.382 0.618

Focus Number File DJYR02 Focus# (High for the swing)

Point Number Support Fib Nodes Point* (Enter highest reaction low first)

CHART 11-15

FIBNODE™ OBJECTIVE PRINTOUTS:

In addition to providing Retracement Numbers (Nodes) at which to enter trades, FibNodes provides you with Logical Profit Objectives which we refer to as Objective Points (OPs). The three targets, or objectives we've been discussing have printouts that look like this:

CHART 11-16

The numbers on the left side of this printout are the values of the A, B, & C points. The numbers on the right side of the printout are the calculated Objective Points.

If you see any extensions on the end of FibNode file names (.FIB .OP), don't be confused. These extensions help the program and therefore the trader to more quickly and easily locate previously generated files.

AGREEMENT ON THE BOND CONTINUATION:

Now that you're familiar with FibNodes printouts, let's consider an example of Agreement that nailed a major weekly low in U.S. bonds. We'll look at the same chart of the U.S. bond market we looked at earlier, but we'll label it in order to determine where likely support will come in, after the double top at the 122 level.

The area of Agreement between the COP (10528) of the A, B, C and the '*' support Node of the up move 1 to F, shown on Chart 11-17, held firmly. Subsequently this area led to a rally in the bonds, from 10528 to a high of 117 a few months later, which was an approximate .618 retracement of the preceding down move! See Chart 11-18.

CHART 11-17

These are FibNodes Printouts detailing the support area in Chart 11-17.

22 Apr 97 23:37:20 Updated: 04/22/1997 0.6181.618

Point Value Objective Points File BDWK02 /in 32nds/

22 Apr 97 23:37:43 Updated: 04/22/1997 0.3820.618

Focus Number File BDWK02 Focus# (High for the swing) An 32nds/

Point Number Support Fib Nodes Point# (Enter highest reaction low first)

12204 1

9601

Copyright (c) 1996 CIS, Inc.

Copyright (c) 1996 CIS, Inc.

In trading, when everyone knows something, it does no one any good. When you know something and everyone else finds out about it later, is does you a lot of good! If everyone believes the stock market or soybeans are going up, they are already long and that knowledge is factored into the market. If you know the outcome of a report or otherwise have inside information that is truly significant, then you can position yourself ahead of time and benefit from those that follow. Such is the case with hidden D-Levels.

Consider Chart 11-19 below. Based on what you have learned so far, label the Focus, Reaction Numbers, and Fibnodes, before turning the page.

CHART 11-19

Did you include Lineage markings in your labeling? Below is the correct labeling of the chart in question. For clarity, the Fibnodes are not shown.

Did you include Lineage markings in your labeling? Below is the correct labeling of the chart in question. For clarity, the Fibnodes are not shown.

CHART 11-19A

Let's go over this Market Swing one label at a time. The Focus Number is the high of the move. Reaction 1 is the first low preceding the Focus Number. Three bars to the left of Reaction 1 is a slightly lower low, which could have been included in the labeling as 2m (for minor). I have omitted this reaction for clarity, since the Nodes it produces would have almost the same numerical value as those produced by the reaction labeled as Reaction 1.

The second reaction is the top of the gap or the bottom of the bar after the gap. This is a hidden Reaction Number and it produces Fibnodes other traders will not be aware of. Fibnode Confluence areas may also be produced which are transparent, even to traders with knowledge of advanced Fibonacci techniques.

Reaction 3 carries no particular Lineage designation. For clarity, I chose it alone, rather than including the Reaction 3 bars to the left of it. Reaction 4 is particularly important since it is ofF a thrust bar. Like 2G, it produces hidden Fibnodes. 4T is more powerful than 2G, since Thrust Reactions are more significant than Gap Reactions. Reaction 5 has the small letter 'f assigned to it to designate 'first.' This particular reaction is important for its ability to get you in the move There will be more on this in the advanced comments section coming up shortly. Reaction 6 is the Primary Reaction Number designated '*'.

Try labeling Chart 11-20 before turning the page, with your enhanced knowledge of D-Level labeling.

CHART 11-20

This is the proper labeling, considering the hidden Reaction Numbers.

CHART 11-20A

ADVANCED COMMENTS:

If I'm trading an active market like the S&P, I'll usually insert reaction lows, even if they are close to one another, and label the lower one (in an up move) with the letter 'm' to indicate 'minor.' In the course of trading I will enter trades consistent with context of course, on the higher Fibnodes created, thereby insuring a fill. I observe the 'm' Fibnodes to determine the strength of the market, i.e. if I am filled and the 'm' Node is not broken, it indicates more strength than if the 'm' Node is hit or slightly exceeded. Without adequate software, or if you were only using dividers, including these minor Nodes would be inadvisable. The time it takes to calculate them and the clutter this presents, particularly on an intraday basis, would be counterproductive. Lines produced by graphics software splayed across the screen would be equally counterproductive.

Remember earlier when I discussed the difficulty you would face when you bought or sold in the right areas? There is great demand for a fill when you are buying at or near the low point of a dip (DiNapoli, "The X'd Trade".) Using Nodes from a slightly higher Reaction Number, like 1 or 3 on Chart 11-19A can be invaluable since you need to get a fill to make any money! These Reaction Numbers produce Fibnodes that will enable you to be filled ahead of other traders. Mark the Fibnodes on the chart with your dividers if you don't implicitly understand this. See the more detailed labeling of Chart 11-19 on Chart 11-21.

CHART 11-21

This same reasoning is the basis for my use of the 7f Nodes rather than 8* Nodes, upon entering orders. The world may be trying to buy at the .382 of 8*. Who knows about, or considers the .382 of 7f? If you try to be too conservative and buy at the .382 of 8* instead ofjust above the .382 of 7f, you 're more likely to get filled only when the Node is destined to break!

Finally, if I can get a Confluence area off of a thrust bar that is not an identifiable reaction low, I am an excited trader. I have strong information the world lacks. I'm looking to make some serious money!

USING FIBONACCI ANALYSIS TO DEFINE MARKET MOVEMENT:

I've alluded to this technique when I discussed Leading and Lagging Indicators in CHAPTER 2. One of my comments referred to utilizing Leading and Lagging Indicators to their best advantage. Using Fibonacci as an indicator to define Movement might be a bit off the mark. It really depends on your experience level with the market in general and Fibonacci concepts in particular. That being said, the basic idea behind this technique is to look at the extent of the retracements, to determine the anticipated Movement of the Market.

Deep retracements presumably lead to a change in Movement from up to down, for example, while shallow retracements would be consistent with a continuation of existing market Movement.

While I have used and taught this method since the mid 80s, I suggest using it only as a confirming indicator, rather than as a primary Directional Signal or Trend indicator. One has to be thoroughly schooled in the application of higher Time Frame D-Levels to keep this particular technique accurate.

Lessons From The Intelligent Investor

Lessons From The Intelligent Investor

If you're like a lot of people watching the recession unfold, you have likely started to look at your finances under a microscope. Perhaps you have started saving the annual savings rate by people has started to recover a bit.

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Responses

  • adonay
    How draw joe dinapoli fib?
    6 months ago

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