A trading session with a breakout rally is often followed by a Taylor Trading Technique Sell Short day. The eMini S&P futures followed this pattern today.
On Tuesday the eMini S&P had a rally out of a breakout setup (I wrote about yesterday’s trade HERE.), closing near the session high. In the normal cycle of the Taylor Trading Technique (TTT), a Buy day is followed by a Sell day, a session in which we look for the market to trade back up to the previous day high and close relatively high in the range. The high close on the Sell day then sets the market up for a Sell Short day on the third day, where a failed rally above the previous day high leads to a reversal and selloff.
However, things are often different following a breakout move. A breakout day is often an emotional trading session as the market’s strong momentum pushes the market above or below “value”; it’s this move beyond “value” that causes the trend to reverse a day early.
In the nightly Swing Trader’s Insight update the comment for the eMini S&P was “exit breakout buys”, Sell Short day. I reiterated that idea in this morning’s watch list, adding that the best trade opportunity would likely be after the 1 PM CT release of the FOMC meeting statement. We anticipate a decisive move and we were most likely to get a decisive move after the Fed, not before.
Stocks saw follow through strength this morning, moving above the Tuesday high to reach 1910.00 by around 11 AM. This rally was welcome; trading above the previous day high is the first move we look for on a TTT Sell Short day. The morning rally didn’t change our plan to look for a trade after the Fed but it gave us more confidence in the setup.
After the 1 PM release the eMini’s first move was to rally, reaching a high of 1909.50. Failure to push above the session high was the first signal that the rally was likely to fail. This failure led to an initial push lower, dropping back below Tuesday’s high and giving the initial sell signal. The market remained volatile, rallying up to 1906.75 before turning down again. The second push below Tuesday’s high proved to be the start of the decisive down move we anticipated.
As is often the case, being patient with a winning trade was rewarded late in the session. A trending market often sets up a positive feedback loop late in the day, where momentum begets momentum as more traders bail out of losing trades and more traders initiate trades in the direction of the trend.
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