The “If They’re Late, They’re Dead” Setup in the eMini S&P Futures Today

This originally appeared as a blog post in Scott Hoffman’s Futures Insight Blog on Friday, July 05, 2013.

As a broker, clients often say things to me along the lines of “the news / fundamentals are bullish, why is the market going down?” Freeing yourself from this kind of thinking not only can help you from some bad trades, if you take it far enough you can profit from the other traders that think this way.

Egypt managed a transfer of power without major bloodshed or disruption of the Suez Canal. Yesterday saw communiques from the ECB and Bank of England that were more dovish than the markets expected. Today we got a US employment report that showed a stronger than expected labor market.

All this added up to a bullish backdrop for the stock market, so the trade of the day was to go long, right? Well, you could make money on the long side early on, but if you got to them later in the morning, the long side proved to be a bull trap.

I’ve found that writing the morning Swing Trader’s Insight watch list is beneficial to my trading for a number or reasons. The biggest help is that by having my thoughts down on paper, I don’t have to rely on my sometimes faulty memory to remember what markets and setups I should be looking for.

Another factor that occasionally benefits me is that the process of writing and getting the morning note out sometimes helps me avoid the whipsaws and emotional markets that we often see early in the day, especially on report days. This can often work well for the stock index futures, where the morning schedule is such that the early morning work is often good prep for trading around the 8:30 AM stock market open.

Before the 7:30 AM employment report, stocks were higher. EMini S&Ps had moved above the rally reference prices at Wednesday’s high of 1613.00 and Monday’s 1620.50 high, reaching up to 1626.75 around 2 AM. Before NFP it was stuck between these two levels.

This is where I thought it was handy to be too busy to trade. After the unemployment report it rallied above the 1626.75 session high. This is the kind of move I would often look to buy into it I anticipated a breakout rally type of a day where we look to buy when we have a signal that the market is starting a new leg in the direction of the breakout.

It was unable to hold this rally, falling back and then recovering a bit before the 8:30 AM stock market open. During the course of this, I rewrote my comment on the eMinis; this rewrite was what made me think to write this post as the change in the market led me to change how I was looking to trade it.

The hour from 7:30 to 8:30 AM was a key period for trend. The first move above Wednesday’s 1613.00 high occurred a little before 1 AM on July 4 and Monday’s high was taken about around 8 AM yesterday. The upside breakout was getting pretty mature by 7:30 AM this morning and post-NFP it was unable to show much upward momentum or hold an advance. Sure, the bullish momentum could come back and give another rally but it was also likely that if a down move got started it could attract selling pressure from trapped longs.

That was why I said to watch Monday’s 1620.50 high; the farther the market moved below there the more pain it was going to cause the late buyers. This is the sort of thing that can be easier to discern when you have some time and distance from the market, and the 8:30 stock market open was a good time to look for a trade.

There were two additional moves over and under Monday’s high. Either of these were signals for a short; the lower high of the second move was chart pattern confirmation of waning bullish momentum. The subsequent selloff got a good boost after breaking below Wednesday’s 1613.00 high.