Top Down Analysis
Application
The application of a "Top Down" analysis is critical to gain a deeper understanding of the current market and to develop a narrative that gets updated daily.
On each timeframe - write a one or two sentence observation. This observation provides clues and warnings that you will carry into the trading day.
Focus
Apply the top down approach towards
Moving Averages
Candle Patterns
Fibs
Pivots
Gaps
Big Bars (especially reversal bars)
Moving Averages
Where are the major averages? (Above price? Below price?) Will price interact with one of these major averages soon? Are the averages spread out or clustered into a group? Is price moving towards these averages or away from these averages?
Fibs
Are there any fib levels of concern? Are we moving towards them or away from them? Which ones?
Quant Levels
50%
100%
150%
200%
Fib Levels
78.6%
100%
111%
123.6%
Pivots
O, H, L, C pivots.
"Overlapping" pivots.
High's and Low's as a wick are areas where we often see supply & demand dynamics so these are just as important in the lower timeframes as full body candles.
Floor Pivots
Floor Pvots use a calculation of the O, H, L, C pivots to identify areas where price may react; there is a lot of history showing that price does respond at these levels - or at the very least these levels help identify when price as "gone far enough" today to trigger Market Makers monitizing their positions.
Gaps
Daily and weekly gaps often become magnets when we get "close" to them - so it is a good idea to mark them as part of the top down analysis and consider which gaps are within the day's likely trading range.
Trading Range
Daily ADR's (Average Daily Range Levels) can and will often act as pivots and levels to trade from. The ADR's are a "SIMPLE AVERAGE" of the daily price range from highest to lowest over ~n~ periods of time.
The ATR's (Average True Range) are an "EXPONENTIAL AVERAGE" of the daily price range from highest to lowest over ~n~ periods of time.
Candles
Are there any candle patterns of note on these higher timeframe charts that could be a signal or a pattern of bias? Some common patterns include
Evening Star Reversal
Morning Star Reversal
iX-10
Inside Bar
Outside Bar
Marubozu Candle
Harami Candle
Doji
Confluence
When considering candle patterns - consider their location in relation to the pivots discussed above; rejection of a pivot with a known reversal candle pattern increases the chances of the trade having a solid follow-through.
Also - location matters.
reversal candles should not be in "continuation zones"
bearish patterns should come from the highs of a chart
bullish patterns should come from the lows of a chart
Divergence
When the S&P is moving one direction & the NASDAQ is moving in the other direction this is DIVERGENCE. While some people attempt to trade this divergence I recommend using it for analysis & bias.
In Sync - go with the markets. Running Divergent - sit out & wait for them to begin moving in sync again. "Most of the time" they will be in sync, because the broader market indexes like the NASDAQ, the S&P, the Russel and the Dow Jones have a lot of the same names within them.
Example
In the section below - I provide an example of a TOP DOWN ANALYSIS wrote in the format discussed above. Notice by the end of the example - how none of these things are "earth shattering revelations" yet they are often the things we "know" but didn't act on because it wasn't something we were actively considering. By writting out the Top Down Analysis we have a record of our anticipation, we have a reminder of our key levels, and we have a formal document to hold our self accountable.
Top Down Analysis (example)
Weekly
Last week's rejection of resistance ended with an evening star reversal and the market opened this week gapped down; that overhead gap is less than 1% from the open today so we are still within range for a gap close. This rejection off resistance has stalled a 4-week advance but has not yet killed the long term bullish trend we've had for 2 years.
Last weeks candle is much larger than the previous 3 candles so I've marked the 50% line. If the market really does want to bear up - it will need to get below that 50% level and close below on the weekly. Right now, the gap close above and the 50% level below are the most pressing pivots on the weekly.
The 10MA weekly is below the 50% line - so the "baseline bet" is for an overshoot of the 50% line & a bounce off the 10-week. This would give the market a much-needed pause in the trend while also recovering the trend for a continuation next week.
Daily
The "Gap & Fade" from Friday went strongly into the close w/ no wick showing on the bottom of Friday's candle (a bearish marubozu). Sunday's open was also a gap down and we've continued to sell off into Monday's premarket so the Monday "daily candle" will be a gap down as well. The market is down 1.25% this morning so the gap is considerable; will be unlikely to attempt a gap close at the open.
Baseline bet - we recover at some point today and close with a rally off the lows. The main thing to get answers on - will be how we close today (either inside of Friday's RTH or below it). Considering how far we've fallen w/ the gap down since Friday's close it would have to be a very strong reversal to get us back inside.
Watch for a bottoming formation - if it comes by 10am we'll likely start the reversal before lunch. If we continue to fade through the morning (past 10am) then I will look at the close of Europe or even after lunch for the reversal.
We are below all the Friday pivots and are inside week (so not near any weekly pivots). The 50% measured move is below and likely gets hit today if we continue to fade.
The Daily 50MA is below the measured move - so if we overshoot that level we'll target the 50MA as the next likely turning point.
