This originally appeared as a blog post in Scott Hoffman’s Futures Insight Blog on Friday, May 31, 2013.
To paraphrase a paraphrased saying. A failed move often creates a good, sometimes great trade in the opposite direction when the market turns on the traders who caught it heading in the initial direction. This is a good reason to watch a market even when you’re kicking yourself for missing the opportunity a big market move gives you.
The gold bulls had a good week this week. Wednesday’s breakout setup gave a big rally on Thursday; the advance really took off when it moved above the psychologically important $1400 level. Buyers had to feel good at yesterday’s close as August futures reached 1417.70 at yesterday’s high.
However, the rally created a new question – would the advance be able to continue? August had Fibonacci retracement resistance at 1413.30; the May 22 high of 1414.00 lined up with that level. This was a good example of the concept of “reference prices”. Rather than use technical indicators or fundamentals or flipping a coin to try to figure out whether a move will continue or halt, we can monitor market activity at a reference price. This allows us to see and have direct evidence of which direction the market wants to go.
With the gold futures today we had a confluence of factors to fill out our idea of what to anticipate today. In addition to reaching up to resistance, yesterday’s breakout rally meant we could anticipate a Sell Short day according to the Taylor Trading Technique. The TTT says a rally ends in an “excess high” as it becomes “overbought”. This sucks in the last buyers and the market peaks as buyers are unwilling to keep buying at increasingly higher prices.
For a TTT Sell short day our standard reference price is the previous session high – we anticipate a failed rally about the previous day high to mark a top; the subsequent move back below the previous high is the TTT signal to short the market. For gold today, in addition to yesterday’s high we also had the previous high / Fib level around $1414 to use as reference prices.
By this morning both these reference prices had been good short entry triggers; by 7 AM it had made a session low of 1405.80. From here our question was whether the selloff would continue, which would warrant us looking for additional short entry points.
Again we didn’t have to try to predict this; we just had to find new reference prices. I drew the green dotted lines at overnight session lows; any of these could have been used for short entry triggers. In the morning STI note I pointed out the May 28 high of 1401.90 as a drop below there could lead to a move below 1400 and from there, who knew how low it could go.
The 1401.90 reference price was taken out around 8:40 AM; after pausing around here for a bit it fell out of bed, dropping to make a new low at 1393.10 in about 10 minutes. A successful test of that low occurred about 10 minutes after that; this test was a signal for short term traders to close out short if they hadn’t yet done so.
A lot of traders think they need to be able to predict where a market is going to go in order to be successful. That’s an expensive fallacy. Successful traders don’t predict; they study markets in order to anticipate where it is likely to go in order to have a game plan to take advantage of the move when the market does what we anticipated. In this way we let the market be in charge and we go along for the ride. In the end that’s the way for us to be successful.
© Scott Hoffman
This material is conveyed as a solicitation for entering into a derivatives transaction.
This material has been prepared by a Daniels Trading broker who provides research market commentary and trade recommendations as part of his or her solicitation for accounts and solicitation for trades; however, Daniels Trading does not maintain a research department as defined in CFTC Rule 1.71. Daniels Trading, its principals, brokers and employees may trade in derivatives for their own accounts or for the accounts of others. Due to various factors (such as risk tolerance, margin requirements, trading objectives, short term vs. long term strategies, technical vs. fundamental market analysis, and other factors) such trading may result in the initiation or liquidation of positions that are different from or contrary to the opinions and recommendations contained therein.
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.
Trade recommendations and profit/loss calculations may not include commissions and fees. Please consult your broker for details based on your trading arrangement and commission setup.
You should carefully consider whether such trading is suitable for you in light of your circumstances and financial resources. You should read the "risk disclosure" webpage accessed at www.DanielsTrading.com at the bottom of the homepage. Daniels Trading is not affiliated with nor does it endorse any third-party trading system, newsletter or other similar service. Daniels Trading does not guarantee or verify any performance claims made by such systems or service.