The VXX: It's Not Magic, It's Fib Pinball - A Real World Example of How To Execute and Manage Trades Using Fib Pinball
On August 10th the VXX moved up close to 14% from the closing price on August 9th to the closing price on August 10th. If we count the After Hours Data from both August 9th and 10th this move was actually closer to 20%. More impressive than the move higher itself was how well the move followed our Fibonacci Pinball guidelines on its way higher. This adherence to our Fibonacci Pinball guidelines allowed us to not only enter a trade with pre-defined stop and target levels but also allowed for us to manage the trade along the way higher maximizing returns while minimizing risk.
I have attached several charts to this post that show the steps in a graphical presentation of how I entered a trade using the Fib Pinball guidelines on August 9th and then managed that trade as the VXX moved higher as it hit those targets along the way. These entry and exit trade alerts along with updates stop management were all posted in real time in the VIX Service here at ElliottWaveTrader.net.
When I posted this chart I noted:
“The most bullish interpretation of this is that we are in a (1)-(2) i-ii to the long side here on the 5-minute chart. This might give another setup to enter long upon a corrective retrace tomorrow...
…I would likely look to add to a long position in the VIX portfolio if we can see a corrective retrace from around current levels. This may not occur until tomorrow though so need to wait and see.”
That bullish interpretation was at the time closing in on a textbook fib pinball (1)-(2) i-ii setup. As we had an initial 5 wave move up off of the 10.93 low that was followed by another smaller degree 5 wave move that was closing in on the 61.8 extension of wave (1). So while at that time we still did not yet have confirmation that the setup was ready to execute I was able to get prepared to enter a trade based on the chart patterns at the time.
The chart below was posted in the VIX room as a Trade Alert on August 9th at 3:51 pm:
When that chart was posted I noted:
“Grabbing some of this week’s calls [8/11 12 strike calls] for the potential purple path. Is full size as this is the only entry on this particular trade but it is an all or nothing trade as these could expire at 0.”
As is visible on this chart the wave i of (3) did end up stopping right at the 61.8 extension almost to the penny. We then got a corrective retrace down into the 61.8 retrace of that wave i. This was the ideal entry point for a trade to the long side with potential targets in the 12.95-13.31 zone.
Now while this trade could have also been made using straight share I personally liked the weekly calls better from a risk to reward perspective. From a timing point of view if this was indeed a (1)-(2) i-ii setup to the upside then the move to the upside should have been imminent. The 12 strike calls expiring in two days offered the best risk to return ratio given the potential target zone. Setting the stop loss at 0 on these calls allowed for the total risk on the trade to be whatever the premium paid for them was. The potential return on them was close to 7:1 at the upper end of the target zone.
So our Fibonacci Pinball guidelines not only gave us a good entry, stop and target levels but provided us with a good idea as to the timing of when that move should occur.
Now after the close on August 9th the VXX did break through the ideal support levels for the wave i of (3) but it did not invalidate the setup, therefore, the trade was still valid going into August 10th.
On August 10th the VXX gapped higher giving us the initial signal that the (1)-(2) i-ii setup that was in place on August 9th was indeed following through.
Below is a chart that is marked up with how the trade was entered and where the exit points where based on our Fibonacci Pinball Guidelines:
- The trade was entered here as this was the 61.8 retrace after getting a (1)-(2) i-ii to the upside.
- The VXX hit the 100 extension at about 10am. This 100 extension is a significant inflection point so as the calls were trading at 2.7x half were closed here. At 2.7x all of the premium paid for the calls was removed so even if the VXX failed at this inflection point and spiked lower leaving those calls at 0 the trade still would end up profitable.
- The VXX cleared that 100 extension inflection point fairly easily and then hit the lower end of the target zone for wave iii at 12.96. Another 1/4 of the calls were exited here at about 4.5x as we were now in the lower end of the target zone.
- After the VXX made another smaller retrace and higher high I moved the stops up for the remainder of the calls to just over breakeven as our Fibonacci Pinball guidelines provided support levels of 12.38-12.16 zone. A break of this zone would signal that the VXX was not going give further follow-through on the impulsive count.
- The VXX retraced almost to the penny of the upper end of the support zone for wave iv and then shot up higher in impulsive fashion.
- While I was fairly confident that the VXX would hit the ideal target of 13.30 based on the micro structure I exited the remainder of the calls @1.20 or 6.3x as we were only 5 minutes away from the regular hours close. The VXX did indeed hit 13.30 in the Regular time hours and then exploded higher in the AH giving us a very extended wave v of (3).
So with an entry price of .19 and an average exit price of .77 we ended up with a 4x trade on the VXX all while very conservatively managing the risk of that trade. There was absolutely no guessing or questioning how to manage this trade. The trade was entered and managed based purely based on what the Fibonacci Pinball Guidelines told me what to do.
While this example is using the VXX Fibonacci Pinball works across all markets and all instruments. Although I have seen it time and time again the precision and power of this tool never ceases to amaze me. When the market provides us with impulsive wave structures there really is no better tool that can pinpoint targets and support levels than Elliott Wave and Fibonacci Pinball.
If you have not taken the opportunity to learn Fib Pinball and apply it to your trading I would highly encourage you to do so.
Here are some additional links which will allow you to learn more about Fibonacci Pinball:
- MORE EDUCATION ON FIB PINBALL WITH GARRETT: https://www.elliottwavetrader.net/elliottwavetheory/glossary.php
- FIRST REAL WORLD EXAMPLE OF FIB PINBALL WITH VXX - https://www.elliottwavetrader.net/members/atchat/index.php?threadId=1926407&d=HTML#nocollapse
- SECOND REAL WORLD EXAMPLE OF FIB PINBALL WITH VXX - https://www.elliottwavetrader.net/members/atchat/?threadId=2981355
- BASICS OF FIB PINBALL: https://www.elliottwavetrader.net/elliottwavetheory/memberlibrary/The-Basics-of-Fibonacci-Pinball-20130129224.html
- WEBINAR ON FIB PINBALL: https://www.elliottwavetrader.net/members/webinarfiles/2013-02-06-19.02-ElliottWaveWadingPool.mp4