On Wednesday the eMini S&P futures sold off out of a breakout setup. The selloff on Wednesday meant we would anticipate a Taylor Trading Buy day for Thursday, and we got a good rally this morning.
Tuesday was a breakout setup (range contraction, directionless session). On Wednesday we got what the breakout setup predicted – a strong directional move when the market broke below the previous day low, with as close near the session low.
A breakout move tends to create an “overbought” or “oversold” condition, which is the market condition the Taylor Trading Technique (TTT) looks to identify and exploit. This makes identifying breakout trades doubly useful – both for the breakout day itself as well as an anticipated TTT setup and trade for the following session.
In this case, the downside breakout on Wednesday meant we would anticipate a Taylor Trading Buy day for Thursday. Specifically, we look for an initial move below the previous day low, our reference price. This initial move lower serves to push out some of the last weak longs and to get late traders to “sell in the hole” before a turnaround. After the move below the reference price we look for a subsequent move back above it to be our trigger for a long entry.
For the June eMini S&P today, our reference price was 2354.75 (the Wednesday low). The 8:30 AM open was 2354.25, and the market traded back and forth over the reference price until 9 AM. You could get long anywhere in the first half hour (a more conservative entry would be to wait for a move above the first day high of 2358.75). The initial stop loss for this trade could go below the day session low of 2351.50 or a lower overnight low if you wanted a wider stop.
The market rallied strongly for the first hour of the session. It reached the 2367.00 overnight high, the first objective, around 9:30 AM however it was unable to clear it. This could be the signal to take profits if you wanted to take a quick profit.
I drew a Fibonacci retracement level on the intraday chart – 2359.50 is the midpoint of the morning rally; I’m watching that as a pivot point for trend for the rest of the morning. If it can hold above there we might see another rally this afternoon. If it can’t hold we could see a washout this afternoon.
UPDATE
The 2359 area support held through the early afternoon. This led to a new rally around 1 PM and reached the 2374.50 Fibonacci retracement objective (see the day chart) by 1:30.
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