In last night’s Swing Trader’s Insight advisory my comment for the EMini S&P futures was “mean reversion day”. I got a couple of emails from subscribers about how to trade this signal so I tried to clarify it in this morning’s watch list for STI (which you can read here).
Today’s mean reversion trade (which Linda Raschke called a “Z” day) is what we often anticipate for the session following a big range day- Tuesday was a WR7 bar. Two consecutive large range days are uncommon, especially when the first day shows a definitive direction. For a mean reversion day, we anticipate that at the end of the day, the market will have shown little change from the previous day close, as traders “digest” the move of the previous day. As a result, we expect to be able to buy breaks and sell rallies, looking for the market to move back to the median.
Last night the EMini S&P futures made a session low of 1996.25. The weak retail sales number at 7:30 AM pushed them below that low, and they were trading below there as the 8:30 AM approached.
As today was a mean reversion day, we anticipated that this selloff would fail, and we would look to go long when we had proof of the failure (we only take a trade when it does what we anticipate-not before.) In this case, proof of the failure of the selloff would be a move back above the first overnight low of 1996.25.
The opening move back above the previous low was our first buy signal. This rally took the market to 2007.00 before turning down. At this point you could be done for the day if you were so inclined, as this amounted to an (approximately) 10 point move by 9:10.
The opening rally couldn’t hold, and stocks sold off midmorning. This wasn’t a surprise, given the mean reversion signal and recent skittishness. This selloff continued into early afternoon as it took out the 6 January low of 1984.25. This low gave us another reference price and given the mean reversion signal, we would look to go long if it failed to follow through to the downside.
The move back above 1984.25 gave us a second buy signal. The market rallied for the remainder of the afternoon and reached the day session high of 2007.00 a few minutes before the 3:15 close.
Essential Guide for Futures Swing Trading
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