The Taylor Trading Technique seeks to identify market actions (moves) and then anticipate likely reactions in the opposite direction. The past two sessions in the soybean futures have been a good example of the action – reaction cycle.
In yesterday’s blog post (read it HERE) I wrote about a breakout trade buy in soybean futures, taking advantage of yesterday’s rally. The Taylor Trading Technique (TTT) says to look for a move in the opposite direction for the following session; this gave us a short sale opportunity this morning.
The TTT seeks to identify and take advantage of setups where other traders are likely to make emotional (and often incorrect) decisions in volatile markets. Breakout moves often create these emotional market conditions, which we certainly are seeing recently in soybeans.
Thursday saw a breakout rally in soybean futures, as they opened near the low of the daily range and ended up closing near the high. For the following session the TTT suggests we look for a Sell Short day- a session in which the market may see early session follow through, followed by a rally failure and subsequent selloff. Our setup for the TTT Sell Short day is to identify the rally failure and short the market when the market rolls over and begins to sell off.
For a TTT Sell Short day we begin by looking at the previous session high as a “reference price”; a level at which we look for a potential rally failure and downturn. However, breakout moves don’t necessarily “use up” their upside momentum on the first day; they often show follow through rally in the next session. When this is the case, we can still look for a rally failure in order to get short, however we can look for higher price levels for our reference price.
For the November soybeans, in this morning’s Swing Trader’s Insight Watch List I suggested we watch the $10.00 level as our reference price. I chose the $10.00 level because of its psychological significance- big round numbers tend to attract a lot of attention. Last night’s trade made a high of 9.97-0 and it closed on the session high, meaning a higher open was likely for the day session, with $10.00 a logical level to watch.
The day session opened at 9.97-2 and rallied to 10.02-0 before turning back down. The drop back below $10.00 was our trigger for a short sale as we anticipated a corrective selloff. Our initial stop loss could go above the session high; if the market rallied back up to make a new high it would indicate the bulls were still in charge, and we only want to be in a trade as long as the momentum is in the direction of our trade.
9.85-3 was the midpoint of the overnight range and a good reference price to gauge whether the selloff was likely to halt or continue lower. The market’s ability to regain this level was a signal to consider covering shorts, given that the market had dropped 20 cents / bu. in 40 minutes.
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