By the Taylor technique, today was a “sell short” day in gold futures.  I won’t go into all the background of the TT, but the gist of it is to figure the short term rhythm of a market to find “excess” highs or lows, then to use these a low risk trade opportunities.

Below is the daily chart for December Gold futures.  After a frenetic start to the rally in late October, it has progressed in an orderly fashion for the past week, Note how the trend line across the lows has provided support on the way up.

I also drew blue arrows to two pivot points on the way up.  A pivot point high is any day that has a lower high on each side of it. Pivot points serve as support or resistance. In this case, breaking above a pivot high gave the rally a new up leg.

The past days have had a good cycle to them.  Tuesday was an inside day and a doji; these were indicators of a possible directional move on the following day.  That’s what we saw, as it opened on the low for the session and rallied, taking out the old contract high and closing near the high of the session.

The relation of the open and close on a bar is significant for the Taylor technique; it tells us whether there was buying or selling pressure over the course of a session.  If you exclude Tuesday’s doji, the previous four sessions closed higher than the open-a sign of buying pressure.

Yesterday’s rally gave us the sell short signal. A four day advance is kind of long for a Taylor cycle, but Tuesday’s breakout setup allowed for the extension, and the length of the advance was indicative of the buying pressure.

It’s not always easy to know where the “excess” will occur to give the signals.  I like to use Linda Raschke’s “pinball” concept.  Linda used short term oscillators to find extremes in short term momentum, looking for likely turning points for the oscillator and coincidentally the contract itself.  I like to use the 2 period Rate of Change indicator for this (I’ll also look at 2 period momentum).  In the daily chart below, ROC is the bottom panel of the chart; I drew a circle around last night’s reading to show the sell signal.

ROC gave the signal

ROC gave the signal

On a sell short day, the play is to look to get short, hopefully at the tail end of the “excess buying”.  Traders who follow Market Profile would know this as the end of an “auction”-auctions often end in excess.  The “excess” buying ends when the last sucker buys the high tick, exhausting the buying pressure.

The excess buying often ends with the violation of the previous day’s high.  The previous day’s high is monitored closely as a potential point for a short entry. In today’s case, we’d be looking to sell as the market dropped back under the previous day’s high.  On the intraday chart below I drew the blue line to show this.  Stops for that short would go over today’s high of 1123.40.

That’s one of the strengths of the Taylor Technique. Taylor waited patiently for an ideal setup, looking for a low risk trade with potentially large reward as the momentum turned. In this case, there was $4.30 from yesterday’s high (entry) to today’s high (stop loss).

Form the short entry around $1119.10; we’d start to look for profit targets for the short sale.  Taylor would generally hold his positions for a day to a few days, depending on the market’s behavior.  However, he was trading in the grains markets in the 1950s, and markets tended to move more leisurely.

For the gold short in question, I had a few points in mind.  The first was the last up pivot at 111.70, as that would be support for a selloff.  Below there, the trend line comes in around $1107.00. Both these targets have been reached; additional targets at $1100, then $1096.00 (2 day support at the beginning of the week).

Yesterday's high was key

Yesterday’s high was key

Normally it would take another day or two to work out the selling pressure and reach an “excess’ low or selling exhaust, but this period can be shortened up in a strong market.  We’ll found out what gold is made of.

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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