This originally appeared as a blog post in Scott Hoffman’s Futures Insight Blog on Wednesday, September 04, 2013.
This morning I got an email asking for an explanation of what I meant and how to trade what I referred to as a “mean reversion day” in the eMini S&P futures. After I wrote my answer to him I thought it was something worth publishing.
The Taylor Trading Technique tells us to anticipate a market to make a directional move for a large percentage of trading days. We anticipate that a Buy day will see the market open near the session low and end up closing near the session high. Knowing this, we look for early session confirmation that the market is trending higher on a Buy day. When we have this confirmation, we get long, looking to ride a daily move higher. Likewise, on Sell Short day we anticipate the market will trend lower and look to get short when we have confirmation of a down trend for the session.
What we anticipate (directionally) on a given day is usually based on what the market did in the previous session. For a Buy day, we most often anticipate a Buy day because the previous session was bearish- the session close is toward the bottom of the daily range and / or the close occurs near the session low. For a Sell Short day we normally see a bullish pattern in the previous session- close > open and the close near the high of the daily range.
If a market has a session where it’s difficult to discern the predominant trend for the day-a close near the middle of the range, open and close approximately equal (doji bar) the market doesn’t give us a directional cue for the following session. From this kind of pattern we can expect one of two things:
1. We can anticipate a mean reversion day (what I anticipated for today). A mean reversion day generally occurs in the session following a day with a large trading range and indecisive direction. We also tend to see them when a market marks time ahead of upcoming news. In this case there’s a lot of US economic data due on Thursday and Friday, not to mention the Beige Book this afternoon.
For a mean reversion day we look to sell rallies or buy breaks, looking for the market to move back to the middle of the range (mean). For the eMini S&P, I would anticipate yesterday’s high of 1650.00 to be the likely resistance.
2. If we have a non-directional session combined with a range contraction pattern (inside day, NR4, NR7 for example) we anticipate a breakout move. In this case we look for the previous day’s indecision to resolve itself into a directional move as traders move the market toward a new perceived “fair value” price. For a breakout day we want to be open minded as to the market’s likely direction. That’s OK, we can let the market tell us where it wants to go.
On a breakout day, we look for close in support and resistance points to serve as reference prices. These are price levels that, if exceeded, are likely to serve as a springboard to a larger move in the chosen direction. We look to enter a trade when a reference price is exceeded, anticipating we can ride a move over the course of the session.
Much of the time, a market’s direction for a given session dictates what the Taylor Trading Technique tells us to anticipate for the next day. In the same way, when a market has a day that doesn’t show a directional bias, this pattern gives tells us what we should likely anticipate for the following day.
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