Yesterday stock index futures staged a rally out of a breakout setup, closing near the session high. Following a breakout rally the Taylor Trading Technique tells us to anticipate a Sell short day; there were a number of interesting factors in today’s setup.
The daily chart is below. Yesterday’s rally stopped a Fibonacci retracement resistance of 1385.13, a 50% retracement of the selloff from the April 2 high to Tuesday’s low. I view the 50% retracement level as the reference price for where a correction is turning into a trend change, so holding under the 50% level would mean we should anticipate a turn back down. Held trade over it would indicate a likely continuation of the rally).
daily chart
Today’s intraday chart is below. A breakout rally often creates the “excess high” that often marks the end of a rally; this “excess high” is the trigger to look for a trend change and Taylor Trading Technique Sell short day.
5 minute chart
The TTT “reference price” for a Sell Short day is the previous session high, in this case 1386.25. This turned out to be a great sale; for me the issue was that the sell signal triggered around 9 PM last night, and that that time I was watching the Blackhawks game, not trading.
So looking at the market when I got in this morning we knew that the Sell Short day signal had triggered and the fact that it was trading so far below the reference price was ample evidence that the intraday trend was down. The morning’s issue was to find a setup for a short sale.
With the Taylor Trading Technique I generally prefer to take entries when the market is moving in the anticipated direction rather than trading countertrend. The TTT allows entry near changes in trend direction; as we’re able to enter so close to trend changes I think it’s important to have confirmation of the trend change.
I saw two confirmation points to use this morning. First was the overnight low at 1377.00, next was the Fibonacci retracement level at 1375.88. We used a move below those prices a trigger for a short sale as the market confirmed it was resuming the selloff. For now I would use roughly the 20 period EMA of 15 minutes (green line on the intraday chart) as the stop loss.
@ Scott Hoffman
This originally appeared as a blog post in Scott Hoffman’s Futures Insight Blog.
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