Markets are great at getting traders to do the wrong thing at the wrong time. It’s often why you see markets take off before you get in or reverse right after you get stopped out.
Today there was a good example of this in the stock index futures. Yesterday saw a negative reaction to the central bank moves to solve the Greek fiscal crisis and European credit market impairment. Early positive reaction in the Euro gave way to skepticism, and the Euro closed well off its high. The Euro’s woes are a negative for the US stock market, as I wrote about here.
The continued slide in the Euro last night pressured stocks, and the stock indices were showing big losses overnight. The eMini S&P looked to be on the edge of the abyss, and many traders were likely thinking we might have another day like last Thursday with its dramatic selloff.
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However, when the stock market opened, stocks started to rally. This rally gained steam as traders who sold in the hole covered and other traders started to do some bargain hunting buying. This rally pushed S&Ps over yesterday’s high by around 11 AM.
This is where the logic of the Taylor Technique shows. In last night’s Swing Trader’s Insight newsletter I labeled today a Sell Short day for the stock indices. On a Sell Short day we look for the market to make a swing high by pushing over the previous session high. The push over the previous session high marks the ‘excess’ that occurs at the end of a swing.
From that high, we anticipate a reversal. The subsequent selloff back under the previous session high is the signal to sell short; it is our signal that the trend has reversed. The intraday chart below shows how this trade developed.
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Today showed the wisdom of Taylor’s method. He preached patience, that traders should wait for the ideal a setup before trading. That’s what we saw today, as the market followed Taylor’s script to a T. The final push up this morning made sure that traders who tried to jump the gun were likely to be shaken out before it made the move we anticipated.
What should you have done with shorts at the end of the day? Today’s daily bar was a Doji, and it had the narrowest trading range of the previous four sessions. This gives a breakout setup for tomorrow; we should anticipate a directional move tomorrow. However, breakout setups aren’t predictive as to market direction, so I’m flat going into tomorrow, and will wait for a breakout trade.
Trading is an exceedingly difficult endeavor. By utilizing the discipline and patience a system such as the TT requires, you can eliminate the mental mistakes that sabotage so many traders.
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.
