When is a Buy Day Not a Buy Day?

by Scott Hoffman on November 20, 2009

I got an email from a trader who read my blog post on crude Oil futures today.  He knows some about the Taylor Technique and Linda Raschke’s ideas, and I had sent him some additional writing on implementing the TT.

Taylor’s cycle doesn’t always run in a nice three pattern.  As I wrote about in the earlier post, yesterday’s selloff in crude oil futures could have made today a TT “buy” day.  If that was the case (a “buy day low violation day”), we would have seen price action around yesterday’s low, then a rally.

Instead, it opened above yesterday’s close last night, rallied a bit, then dropped like a rock.  Linda Raschke refers to a setup like this as a “Power Sell”.  (There’s also a “Power Buy” that occurs after an up day (Low to high price action)).

A Power Sell occurs after a down day, on what would normally be labeled a TT buy day.  With a Power Sell setup, the market opens above the low of the previous session (the low being the reference point for a TT Buy day.) On a Power Sell you’ll see the market trade slightly higher, against the direction of the previous day’s trend).  What we’re looking for is an opportunity to short, with the expectation that the bearish momentum will reassert itself.

That is, in fact, what we saw last night-slightly higher early action, followed by a great short sale.  On a Power Sell we play for a move to the previous day’s low, potentially setting up a TT Buy day.

The thing that made today’s Power Sell significant was the fact that it retested the Fibonacci retracement level of 78.57 (the midpoint of the last rally).  This support was broken yesterday; the overnight move last night stopped at that Fib level before the selloff.  This is an example of the old adage that “broken support becomes resistance).  The 30 minute chart below shows how that level was solid resistance before the selloff.

The daily Fib level was resistance

The daily Fib level was resistance

The “Power” day concept gives you a framework to trade the transition days.  These are days where you’re not sure whether you’ve got a TT Buy day following a Sell Short Day, or an opportunity to capitalize on residual momentum.  If anyone wants to adhere strictly to Taylor’s formula, this is a “Buy Day, High Made First” trade.)

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. Past performance is not necessarily indicative of future performance. The risk of loss in trading futures contracts or commodity options can be substantial, and therefore investors should understand the risks involved in taking leveraged positions and must assume responsibility for the risks associated with such investments and for their results.

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