In my previous post (read it HERE) I wrote about a breakout trade in gold futures today. In the session following a breakout move we often anticipate a move in the opposite direction, and the Taylor Trading Technique gives us a framework and setup to trade that move.
On Thursday the EMini S&P futures had a breakout rally. Thursday was a good example of a Taylor Trading Technique Buy day, where the market opens near the low of the daily range and then rallies to close near the top. Thursday’s rally was a good crescendo to this week’s move, as the market closed at a nearly two week high.
In the Taylor Trading Technique cycle, a Buy day is normally followed by a Sell day. A Sell day is a session in which we may see some upside follow through from the previous day. A Sell day would then be followed by a Sell Short day, which sees the market top out and then sell off.
The logic behind Taylor Trading Buy and Sell Short days is that markets tend to overshoot “value” as many traders chase the move. It is this overshoot that gets you to buy at the high and sell at the low. A breakout move often overshoots “value” on the first day, so a breakout rally is often followed by a Taylor Trading Sell Short day (likewise, a downside breakout is often followed by a TTT Buy day).
As we expected a Taylor Trading Sell Short day for the EMini S&Ps today, we would look for an early session rally. Further, we would look for this early rally to fail, and short the market when we saw the market fail.
In this morning’s Swing Trader’s Insight watch list I pointed out two reference prices- the pre-market (pre 8:30 AM) high and the previous day high. An initial move above those highs would be a heads up to look for a failed rally and a subsequent move back below the high(s) would be our signal of a trend change / short sale.
The pre 8:30 open was 2065.50 and Thursday’s high was 2058.75. The first move of the morning was a rally to make a new session high of 2068.00. This rally was likely enough to stop out some weak shorts and get some breakout chasers to buy. This proved to be the high of the session, and the market started to edge lower. Aggressive traders could have sold on the move back under the 2065.50 high, with a stop loss above the 2068.00 session high. A series of lower highs through the morning indicated waning momentum.
Cautious traders could wait for the standard Taylor Trading entry, when it broke Thursday’s low of 2058.75. This sell signal first occurred shortly after Noon CT, and the final opportunity came around 1:45 PM. The selloff continued, dropping to a session low of 2044.50 around 2:30.
Essential Guide for Futures Swing Trading
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