Many traders look at price charts in order to get an idea as to what the market has recently done. When I look at a price chart my real focus isn’t to see what it did in the past; past action is only important if it helps you to anticipate what the market is likely to do in the future.
The day after a big range day is kind of hit or miss for trade setups. They often attract a lot of newbie and impulsive traders. The big range day is like a billboard for them as they look to try to catch the move that they missed in the previous session. In reality, back to back big move days occur infrequently and the traders who are late to the party often end up getting chopped up in a directionless market in the aftermath of a volatile session.
Having a more forward thinking view of the markets can change how you view these sessions. Rather than look for a second session with a big move, I often suggest that traders look for what I call (Linda Raschke’s term) a “Z” day. A Z day is a day for the market to consolidate after a volatile day. For a Z day we can look to either sell a rally or buy a break in anticipation of the market returning toward the middle of the price range.
(For a decent example of a Z day, look at today’s action in the eMini S&P. After an overnight rally, this morning saw an opportunity to buy when support at 1550 held and a sale at the March 20 high of 1555.75, which was a reference price yesterday.)
However, Z days still have trade opportunities, we just need to look for a different kind of setup. Much of the financial market action has revolved around Cyprus news and by association, the Euro. This made the Euro an important market to watch today, both for correlations with other markets and potential trades as well.
By the Taylor Trading Technique today was a Buy day for the Euro futures. The Buy day meant we should anticipate an early selloff and then that this selloff would stop and reverse to a rally. This morning I advised caution in buying it; I had a good reason and what might be a more questionable reason for suggesting caution. The good reason is the chart- the daily trend is down and it’s trading near the recent lows. The other reason is that someone I talk to is currently long; this probably shaded me toward being more cautious.
Overnight there had been one push under last week’s low of 1.2852. That time the low held, would it do so a second time? Fortunately we didn’t have to try to guess ahead of time. We could let the market decide; we just needed to monitor it and trade it when it made up its mind.
When I was writing the morning watch list I wondered whether the best buy opportunity had already passed as it had already sold off (if the 1.2852 was the reference price) and then rallied. Still you never know, and with all of yesterday’s big moves I wanted to keep an eye on any market that might have potential.
I didn’t look for a fundamental reason for it but a sharp selloff started around 9:45 AM. This break took out the overnight low and quickly fell to make a new session low of 1.2836, which was one tick below yesterday’s 1.2837.
This one tick low did a good job of shaking out weak longs and a bear trap for traders who hoped lightning would strike twice. Monday’s low held, the ensuing rally was the buy signal for a Taylor Trading Technique Buy day. The rally took out the previous session high of 1.2893 before running out of momentum. For the rally to fail was as logical as the selloff ending; both fit with the mean reversion concept of a Z day.
This is a sample of the analysis from my Swing Trader’s Insight advisory service. For information on STI, and to sign up for a free two week trial, visit here.
The information contained here includes information from sources believed to be reliable and accurate, but no guarantee is made as to accuracy, nor do they purport to be complete. Opinions are subject to change without notice.
THE RISK OF LOSS IN TRADING COMMODITY FUTURES AND OPTIONS CONTRACTS CAN BE SUBSTANTIAL. THERE IS A HIGH DEGREE OF LEVERAGE IN FUTURES TRADING BECAUSE OF SMALL MARGIN REQUIREMENTS. THIS LEVERAGE CAN WORK AGAINST YOU AS WELL AS FOR YOU AND CAN LEAD TO LARGE LOSSES AS WELL AS LARGE GAINS.