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DiNapoli Levels
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INTRODUCTION & CAUTIONS:

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 1 .

1 Joe DiNapoli, "X'd Trade or Where's My Fill?" Technical Analysis ofStocks & Commodities, March 1995, page 88.

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.

DINAPOLI LEVELS ™ :

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.

FIBINODE 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.

FibNodes™ 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 ofthis approach.

LINEAGE MARKINGS:

Lineage Markings 2 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. Ifyou 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 ofFibnodes, created from the proper application of DiNapoli Levels to the price axis. It is not the Fibonacci Summation Series discussed under Basic Fibonacci Analysis in CHAPTER 8.

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.

Chart 9-4 is an example of how Agreement arises:

Now let's look at a slightly more complex wave.

3 REACTION LOWS

6 FIBNODES

2 CONFLUENCE AREAS

CHART 9-5

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.

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