DiNapoli Levels are applicable, with uncanny accuracy, from one minute charts to yearly charts, perhaps longer. If you plan to trade the very short term, be prepared to work hard, very hard. Even though computers, used in conjunction with the proper software, can ease this workload, diligent attention wears all of us down. Regardless of the quality of the approach or the thoroughness of your analysis, it’s easy to burn out, and in the process squander hard won equity.
Throughout this book, I am attempting to include not only the product of my research, but also the knowledge and experience I have gained from hard won trading lessons. I feel it’s a part of my mandate to wave red flags at the sand traps. Since I’ve been teaching a long time, I’ve had ample opportunity to observe both the successes and failures of my students. These observations have led me to the following cautions. Once you have digested the material and have learned to apply DiNapoli Levels properly, you need to be watchful of overconfidence and the consequential lack of money management that results from a series of unbelievable calls. Aside from that, sloppiness in the application of context, as well as lack of experience with order entry and floor operations, are additional serious pitfalls. If you are buying and selling in the wrong place, it doesn’t matter if your floor knowledge is limited. You’ll lose anyway. When you buy and sell in the right place however, there is great competition for fills and you will experience problems you may have never encountered before.
ELLIOTT WAVE PRINCIPLE:
Many believe that Elliott Wave Principle is synonymous with Fibonacci Analysis. It is not. Fibonacci analysis can stand on its own (not recommended) or as part of an overall trading strategy which includes or excludes Elliott Wave. Those of you who are familiar with the Elliott Wave Principle will quickly find particular value in the trading approach taught in this book. Knowing where you are in a particular Elliott Wave count is confusing at best to long time practitioners, let alone newcomers. DiNapoli Levels circumvent the problem and look at waves as expansions and contractions of themselves, period.
In CHAPTER 8, I described basic Fibonacci analysis. Some form of this basic approach is what most people practice when using Fibonacci analysis on the price axis. That’s fine as far as it goes, but to progress to a deeper level, we must have a variety of definitions to clarify and quantify our thinking. Understanding these definitions is an absolutely essential prerequisite to your command of the subject matter and for your eventual application of advanced Fibonacci analysis (DiNapoli Levels) to the markets. So, refer back to these definitions as many times as necessary, until you can call them your own.
MARKET SWING: A Market Swing is a trader-defined market move, lasting minutes or years, taken from a “significant” market low or high, which occurred sometime in the past, to the most recent high or low. A Market Swing can be referred to as a wave. In the following chart the Market Swing would be between the Focus Number and Reaction 5.
REACTION NUMBER or POINT: A Reaction Number usually is a low or high point within a given Market Swing (numbers 1 through 5). I have avoided using the terms “swing high,” or “low,” in the definition of Reaction Numbers for two reasons. First, some of you will attach certain inapplicable qualifiers to this term. Second, we will have Reaction Numbers in areas that “swing highs” and “lows” cannot possibly be found.
There can be multiple Reaction Numbers within a Market Swing. What determines whether Reaction Numbers are lows or highs is the Movement of the Market Swing. In our example, each swing has five Reaction Numbers. For our purposes, Point 5 is considered to fall within our definition of Reaction Numbers, even though Point 5 might not be reacting from any previous point. It could be, for example, an all time low price, as with hot, Initial Public Offering (IPO). In fact, Point 5 has very significant importance, as it is the extreme of the Market Swing. It is referred to as Primary Reaction Number or indicated by the ‘*’ symbol.
FOCUS NUMBER: The Focus Number is the extreme of the Market Swing. It is the location on a chart, from which all retracement values (Fibnodes) for a given Market Swing, are calculated. If the Focus Number changes, all Fibnodes for a given Market Swing change as well.
FIBIMODE or NODE: A Fibnode or Node is a number based upon Fibonacci retracement ratios, which will elicit support as the market approaches it from above or resistance as the market approaches it from below. Two Fibnodes, or Nodes, are calculated, one at a .382 retracement, and the other at a .618 retracement between the Focus Number and a Reaction Number. FibNode is also the name of a software program used to calculate and present Fibonacci retracements and objectives. Within this text, except for headings, FibNodes will appear with a capital F and a capital N when referring to the software program.
OBJECTIVE POINT: An Objective Point is a number based upon Fibonacci expansion ratios, which marks a targeted Profit Objective for an advancing or declining wave.
CONFLUENCE: Confluence (‘K’) is a price point or area which occurs when two Fibnodes from different Reaction Numbers have the same, or almost the same numerical value. The Confluence must occur only between .382 and .618 Fibnodes. An area of Confluence would include the Fibnodes that create the Confluence, as well as the range of price between them.
Confluence presents significantly stronger support or resistance than a single Fibnode. Confluence (closeness) is dependent on the volatility and Time Frame of a Market Swing. Fibnode Confluence can therefore be widely disparate from one chart to the next. For example, the extremes of the price range of a one minute or a monthly chart are incredibly different. Likewise the price range in a given Time Frame may vary widely. We might have a range of price in one day of 250 points, and 1250 points in another day. Confluence is subjective. It keeps the programmers and non-judgmental traders confused, and that’s healthy for the longevity and usefulness of this approach.
LINEAGE MARKINGS: Lineage Markings2 are semi-circular arcs used to visually identify which Reaction Numbers create a given Fibnode.
LOGICAL PROFIT OBJECTIVE: A Logical Profit Objective is a predetermined price point where orders will be placed in the opposite direction from that which you are trading. If you’re long, this will manifest as resistance. If you are short, this will manifest as support. Two Logical Profit Objective location techniques are Oscillator Predictor Points, and Fibonacci-derived points. Fibonacci-derived points can be those that come from Fibonacci expansion analysis, or, as you will see, levels created from certain Fibnodes singularly, or at Confluence levels.
Since trading is simply a game of percentages, it should follow that accurate (Logical) Profit Objective Points would significantly increase your ability to evaluate your percentage, your chance of continued profit!
AGREEMENT: Agreement is an area of price which occurs when the proximity of a Fibnode and an Objective point (COP, OP, or XOP) is “acceptably close.”
FIB SERIES: A Fib Series is the combined set of Fibnodes, created from the proper application of DiNapoli Levels to the price axis. It is not the Fibonacci Summation Series discussed under Basic Fibonacci Analysis.
DINAPOLI LEVELS or D-LEVELS: DiNapoli Levels are support and resistance levels created from a specific set of rules, governing the advanced applications of Fibonacci analysis to the price axis. DiNapoli Levels include Fibnodes, Objective Points, Confluence, and Agreement price areas.
The first step in determining DiNapoli Levels is the proper location of the Focus and Reaction Numbers. Let’s take a look at the following chart:
In Chart 9-2, we’re looking at the progression of a Market Swing over time. The Focus Number is the high of the move. In the PAST wave, Reaction 1 is the Primary Reaction Number. This wave would produce two Fibnodes. The old Focus Number at O in the CURRENT wave, has no significance in determining the new or current Fibnodes. The CURRENT wave has two Reaction Numbers, 1 & 2. Reaction Number 2 is now the Primary Reaction Number. As we learned in CHAPTER 8, there are two Fibnodes per Reaction Number, therefore we can now generate four Fibnodes.
The following Chart 9-3 shows four Fibnodes, a Confluence area, and Lineage Markings. There is Confluence ‘K’ in the area created by the .618 reaction of the F to 1 leg, and the .382 reaction of the F to 2 leg.
It is crucial for you to know which Reaction low created each Fibnode pair. They must be clearly associated. Fibnode Lineage tells us a lot about the nature of our response when that Node is approached by market action. A bunch of lines splayed across a chart with no identifying Lineage only confuses our action. It doesn’t help us. There’s no need to place Lineage Markings up to the Focus Number, since all Fibnodes in a Market Swing are created from the same Focus Number. That’s why it’s called the Focus Number.
Chart 9-4 is an example of how Agreement arises:A .382 support Fibnode between the Focus Number ‘F’ and Reaction 1 is acceptably close to an OP expansion from C. Acceptably close is subjective. It is dependent upon Time Frame and volatility.
Now let’s look at a slightly more complex wave.
Chart 9-5 is obviously an up wave. A down wave would be annotated in a similar manner, consistent with the charts shown earlier. In this up wave, we have two Confluence areas, K1 and K2. If you choose to be a buyer as the market progresses upward (context), it would be an excellent strategy to buy just above the Confluence area K1, and hide your stop just below the K2 area. The specifics of order entry will be covered later in the Fib tactics section, CHAPTER 13.
Now let’s look at a real market example, so you can see how effectively the concept of Confluence works in real life trading. Below is Chart 9-6, the monthly deutsche mark.
If we label this as shown earlier in the idealized Chart 9-2, we’ll have four Fibnodes, two of which create the Confluence area shown in Chart 9-7.
As expected, the Confluence area provides substantial support and sets up the market for a major rally. See the daily Chart 9-8.
If we didn’t know about the monthly Confluence area and we were short this market, we would be in for a surprise. From our definition of Logical Profit Objectives, this area of Confluence would have been a great place to close our shorts. If we were monthly-based players, we could then wait for a retracement back to reinitiate our short positions (as long as our context for the trade remained in effect). If we were daily-based players, there are a number of ways we could get long the daily move. I’ll consider a few.
1.The rally off of Confluence looks suspiciously like a daily Double Repenetration. If it were (not shown) we’d jump on the long side like a duck on a June bug. We could do this in a number of ways.
- A. Buy the first shallow retracement, after the Confirmed Double RePo.
- B. Buy stop the high, after the smallest of pull backs, after the Confirmed Double RePo.
- C. Anticipate the Double RePo, and enter the market after a pull back, but with some Confirmed intraday Trend in our favor.
2.Enter the market on a retracement, after a Confirmed Trend up in the Time Frame of our choice.
3.Look for a Directional signal to support our trade. Enter on the long side accordingly.
While it was not specifically mentioned in our Directional Indicator chapter, (you wouldn’t have had the basis for it), a strong Confluence area, particularly on a weekly or a monthly chart could be a Directional signal on its own. This approach is a bit risky, unless the market is oversold as in “Stretch.” The way I employ this strategy is to wait for a Confirmed Trend, in this case up, then employ one of the Fib tactic entry signals we will cover in CHAPTER 13. A number of my students will “Bonsai” into a Confluence area. I typically use either Minesweeper A or B. My suggestion to you, is not to jump ahead now to see what these tactics are. I think it’s better for you to reread this section later and stay with the chronology of the book.
IMPORTANT POINTS TO NOTE:
- If you didn’t precalculate these DiNapoli Levels on the monthly chart, you wouldn’t have any idea that support was about to manifest. The market was falling like a stone. You should always study the higher Time Frame charts, so you know where you are in the bigger picture.
- If you look at the daily (not shown) in the vicinity of the first (highest) Fibnode shown on Chart 9-7, you would have seen a nice playable rally.
- On Chart 9-7, if you re-label 2 to A, 1 to C, and the high preceding 1 to B, F would have been a near perfect OP.
- There will be a much more compelling example of Confluence coming up later in CHAPTER 11 involving the 500 point single day Dow decline. It’s delayed until later because it is a little more complicated. It involves more reaction lows and consequently more Fibnodes. I realize it’s best to learn to walk before we start to run.
THE PROPORTIONAL DIVIDER:
Let’s back up a little and talk about how to get DiNapoli Level markings placed properly on a price chart without spending much money. You can use a precision architectural tool called a proportional divider (precision ratio compass):
The proportional divider is the least expensive way to properly pinpoint DiNapoli levels, since it allows you to identify Fibnode locations and Lineage, quickly and easily. I do not recommend the use of graphics (technical analysis) software4 to accomplish this task, since you’ll get a series of unidentifiable lines splayed across a chart. This type of presentation will degrade your ability to confidently act on the information at hand.
If you want to use a computer to accomplish this, you have a couple of choices. With enough talent, understanding of the concepts, and foresight of your trading needs in the heat of battle, you may be able to adequately program a spread sheet. Otherwise our FibNodes software produces a tabular printout with identifying characters. This presentation accurately characterizes the type of Fibnodes you are encountering in current market action. The characters act similarly to Lineage Markings. Using the software does not dispense with the utility of the divider. A high-quality proportional divider is great to have around. If you are trading intraday however, it is effectively impossible to accurately keep up with things, without adequate software.
BOTTOM LINE: Use a divider and/or adequate software for best results!
- Part of book: Trading with DiNapoli Levels By Joe DiNapoli