Today felt like Groundhog Day in stocks; there was another test of recent highs that failed to follow through, then a selloff. The Taylor Technique told us to look for a selloff today; let’s look at how you could have recognized this and how to trade it.
Below is a daily chart of the December eMini S&P. Looking at this week’s action; Monday saw a relatively quiet session following the big selloff on Thursday / Friday. This gave a breakout setup for Tuesday; this was indicated by Monday’s range contraction, inside day, and doji.
Monday’s breakout setup yielded a breakout rally yesterday. A breakout day should see the type of action that S&Ps had yesterday; an open at one end of the day’s range and a directional move, closing at the other end of the day’s range. Yesterday’s close was right up against the recent highs around 1112. The rally and strong close likely raised the bull’s hope that an upside breakout was in the cards.
However, the Taylor Technique told a different story. Today was a TT Sell short day, following a Buy day on Monday and a Sell day yesterday. I circled the ROC line in the bottom panel of the chart; it was at a level that confirmed the sell short signal.
That’s a lot of resistance
On a sell Short day, we used the previous day’s high as a reference point. On a Sell short day Taylor viewed a rally beyond the high of the Sell (previous) day as an “excess” high. For those that know Market Profile, this is the same concept as the “buying tail” at the end of a buying auction. It’s the action that occurs as the last bulls get in.
On a Sell Short day, we look to sell when the market starts to take away the “excess” by trading back below the Sell day high. This selloff is actually the start of a bigger move that the Sell Short day seeks to exploit. In Market Profile terms, this is where the market transitions from a buying auction to a selling auction.
Looking at a 10 minute chart of the Dec. eMini S&P futures (below), we see the previous day’s high and the ’09 high was taken out shortly after the AM stock market open. This set up the short sale opportunity of the Sell Short day.
Breaking yesterday’s low was the short sale trigger.
A short entry was triggered around 10 AM as they fell back through the highs, and they dutifully sold off. I drew a green line at the previous session low of 1105.25; it was a natural price objective for a selloff.
Looking ahead to the rest of today’s session, I’d continue to watch the old 1105.25 low as a reference price. There was a (thus far) successful retest of the low around 1 PM; if that low holds, there could be a bargain hunting rally this afternoon. A break below that low would likely bring in more selling and an afternoon break. Looking back to the daily chart, 1100 is trend line support and the midpoint of this week’s range – a likely target.
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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