The stock index futures saw a sharp selloff today. For the EMini S&P futures, Friday’s chart pattern told us to look for a strong directional move today. Here’s how we traded it.
In last night’s edition of Swing Trader’s Insight (STI) I labeled the EMini S&P futures as a breakout setup for today, as Friday was an inside day and NR7 (narrowest trading range of the previous seven days).
Much of the time we look for the futures markets to follow the Taylor Trading Technique cycle. A rally today often leads to a market putting in a short term top and then selling off in the following session. Thus, we can use a session’s directional movement to anticipate the likely direction for the next session.
When a market has a session with a lack of directional movement, we don’t have our normal action – reaction cycle to anticipate the next day’s likely direction. However, a breakout setup can give us something more valuable. The range contraction and lack of direction of a breakout setup pattern often tells us to anticipate a range expansion and concurrent directional move in the following session.
Today’s breakout setup for the EMini S&P futures told us to anticipate a relatively large directional move for today’s session. However, rather than looking for a move in a specific direction, we let the market decide which direction it wants to go; we look to identify the direction early in the session, expecting the market will continue to move in that direction for the session.
The first cues to use for a breakout day are the previous session high and low. Specifically, we look for a move above the previous session high or below the previous session low to be the trigger for a trending move in that direction. With the June EMini S&P futures, today we would look for a rally above the Friday high (2131.00) or a break of the Friday low (2122.75) as our initial entry level.
As I was writing the STI morning watch list, the market had traded below the Friday low and showed no signs of moving back above it. As we approached the 8:30 AM stock and pit market open we would look for a move to confirm the downside momentum of the overnight trade. I wrote that we should look for a break below the overnight low (2115.25) as a trigger price to enter short positions.
We got this break shortly after the 8:30 open, pulling us into a short trade. The initial stop loss could be placed above the day session high of 2119.25, or higher if you wanted to use a wider stop. (I chose the day session high- on a breakout move; the market shouldn’t retrace to take out old highs.)
The market proceeded lower though the session, making lower lows and lower highs throughout the day. Traders could continue to trail stop losses down as the market sold off, or taken a profit if you identified a downside objective.
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Essential Guide for Futures Swing Trading
In this guide, experienced trader and broker Scott Hoffman explains the trading methods he uses to analyze and trade the futures markets and to publish his trade advisory, Swing Trader’s Insight.
STOP ORDERS DO NOT NECESSARILY LIMIT YOUR LOSS TO THE STOP PRICE BECAUSE STOP ORDERS, IF THE PRICE IS HIT, BECOME MARKET ORDERS AND, DEPENDING ON MARKET CONDITIONS, THE ACTUAL FILL PRICE CAN BE DIFFERENT FROM THE STOP PRICE. IF A MARKET REACHED ITS DAILY PRICE FLUCTUATION LIMIT, A "LIMIT MOVE", IT MAY BE IMPOSSIBLE TO EXECUTE A STOP LOSS ORDER.
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