After a two day rally, today the eMini S&P futures were on the Sell Short day of the Taylor Trading Technique (TTT) cycle. Using the overnight trading range gave us an additional (and more favorable) reference price to trade against.
Monday was the Buy day of the TTT cycle and it followed the Buy day script, making an early sessi0n low followed by a rally and a moderately bullish daily pattern (close > open, close in the top 25% of the range). Tuesday was the TTT Sell day, yielding an (irrationally?) exuberant rally, reaching a 50% retracement of the December selloff and the 200 day SMA. (see the daily chart below)
The two day advance meant we should look for a Taylor Trading Sell Short day setup for Wednesday. On a Sell Short day we anticipate an early session rally to put in a top. This move higher pulls in the last of the bulls and entices the last weak shorts to cover.
On a TTT Sell Short day we anticipate this top will be put in, and look to go short when the market begins to sell off. We generally use the previous day high as a “reference price”- a move above the previous day high is a heads up signal to look for a reversal and a subsequent move below the reference price is our trigger for a short sale.
I like to use night session highs and lows as additional reference prices, as momentum may lead to the market rallying above the previous day high on a Sell Short day (or below the previous day low on a Buy day). Sometimes this higher high turns out to be a higher reference price for the day session, which is when I look to trade.
As I noted in the Swing Trader’s Insight morning watch list, in today’s pre-market trade the March eMini S&P futures reached 2050.50, well above the Tuesday high (and standard reference price) at 2045.75. This gave us two potential trade triggers for the day session. First, we could look for a failed rally above the 2050.50 overnight high. Second, if the market didn’t rally we could look to short when the market dropped back below Tuesday’s high of 2045.75.
The 8:30 AM open was 2048.25 and it quickly rallied, reaching a new session high of 2052.25. The up move stopped here and within five minutes it dropped back below 2050.50, triggering our short sale. Our initial stop loss was placed above the session high. We shorted the market in anticipation of a selloff; if it rallied instead, we would take our loss and look for a new setup later (In a blog post earlier this week I wrote about taking a loss in order to get a better positon later.)
The morning selloff continued, dropping below 2045.75 (Tuesday high) just after 9 AM. This was the standard TTT Sell Short day reference price and could be used as a price trigger for additional short sales if you wanted to add on to shorts.
I pointed out the 2041.00 level as the first support / downside target; this was the area of the Fibonacci retracement level and the middle of an overnight channel. 2038.00 was a significant overnight low and our second downside target. In the interest of risk management I would prefer to cover shorts ahead of the 1 PM Fed announcement- the risk / reward of holding a trade into it isn’t good, and being flat would allow us to look for new trade setups if we chose to do so.
(Charts courtesy of FutureSource)
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