This morning I was talking to a client of mine.  He had purchased some December puts on the Eurocurrency earlier this month.  Having ridden out a couple of rallies, we were strategizing as to whether he should sell them today or hold on.

His thesis for staying short (long puts) was that yesterday’s rally was the third rejection of a move over 1.5000.  Thinking in Taylor Technique terms, his use of the word rejection got my attention-the Taylor Technique teaches us that market swings end and reverse direction when an “excess” high or low is made.  This “excess” is rejected at the end of a swing; this rejection is the beginning of a move in the other direction.  One of the strengths of the Taylor Technique is having a framework for recognizing and trading these “excesses”.

Below is the daily chart for the December EuroFX futures.  The two recent moves over 1.5000 are on this chart; the third attempt occurred in October. The middle panel of the chart is the two period Rate of Change (ROC) indicator.  Note how ROC peaks and reversals tend to occur at swing highs and ROC bottom reversals occur at swing lows.

I drew the red arrow to show how the ROC bottom n Thursday gave a buy signal for Friday. Friday did see a test of Thursday’s low then positive price action during the session (closed higher than the open); the type of action the Taylor Technique says to expect on a buy day.

Friday was the “sell” day of the Taylor Technique cycle. The “Sell” day title is kind of confusing. A “sell” day is intended to sell out positions purchased on the “buy” day, not to sell short.  In fact, Taylor made provisions for buying on a “sell” day (that’s where it really gets confusing). The roadmap for a “sell” day is for positive price action, with the market at least exceeding the high made on the buy day.

In the case of the Euro here, the buy day rally was an inside day and saw range contraction; this range contraction gave the market the energy for Monday’s rally.  Yesterday’s rally pushed the ROC to a level to give a “sell short” signal.

An idealized TT “sell short” day would see a failed rally as an attempt to trade to or over the sell day high would lead to the “excess high” that would mark a swing trend reversal.  In this case, the overnight rally couldn’t reach yesterday’s high, but the high to low price action is classic TT “sell short” day action.

So to come back to my client, we were talking when the Euro was around 1.4830.  I pointed out that 1.4836 is a 50% retracement of the past two weeks’ rally.  I’m not a huge Fibonacci follower, but I’ve found the 50% retracement level to often be a make or break level between a correction and a price change.  Note how the 1.4836 Fib level also served as support last week as lower prices were rejected and it swung back up.

So what do we see for tomorrow? (After all, isn’t the point of analysis to get a mental map of where you think a market will go?).  The ROC has dropped back to a level giving a buy signal; so I’ll likely have a bullish bias for tomorrow.  I’d add the caveat that a solid close under the 1.4836 level is an indication that the trend is likely turning down.  Lastly, the wide range today increases the odds that we have a consolidation day tomorrow.  Linda Raschke calls these “Z days”, as the market spends the morning testing the highs and lows, often forming a Z shaped chart.

The combination of the TT cycle and some chart patterns form the basis for my trading methodology.  Study of these methods can help increase your powers of anticipation, making you a more confident trader.

The ROC shows the rhythm

The ROC shows the rhythm

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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