For Tuesday the EMini S&P futures were on the Sell Short day of the Taylor Trading cycle. As I noted last night in Swing Trader’s Insight, this gave us an opportunity to get short last night and a second chance during the day session.
On Monday these was an upside breakout move of sorts after Friday’s range contraction. Monday showed range expansion and a solid bullish pattern- the close was above the high, the close was at the top end of the daily range and solidly above the Friday high. Monday’s bullish profile meant we would anticipate a Taylor Trading Technique (TTT) Sell Short today.
On a TTT Sell Short day we anticipate the market will trend lower over the course of the session, finally closing near the low of the daily range. Our key play for a Sell Short day is to look to get short early in the session to take advantage of the down trend.
If all we got out of the TTT was the ability to anticipate a market’s direction for a session, it would still be useful for trading by keeping us from fighting the trend. However, the TTT also gives us a specific trade setup to look for, one that allows us to enter a trade when it begins trending in the anticipated direction.
This second part, the trade entry, lies in the concept of a “reference price”. For a Taylor Trading Sell Short day, we use the previous day high as our reference price. The setup and trade trigger consists of two parts. First, we look for a move above the reference price (previous high) as a heads up to look for a trade entry. Second, a subsequent move back below the reference price is our trigger for as short sale.
This reversal above the previous day high can be powerful. The previous day high tends to be significant, as it’s where traders decided the market was “too expensive” that day. This means it’s often significant for the following session. A move above the previous high will tend to attract buying, either from shorts covering losing trades or traders who look for yesterday’s rally to continue.
On a Sell Short day the TTT tells us to look for this initial up move to fail. These are the occasions where you feel like you were stopped out of a short at the high of the day or you bought a failed upside breakout. The TTT Sell Short day seeks to take advantage of other traders buying the high.
We do this by shorting the market when it drops back below the previous day high (reference price). Breaking below this level means everyone who bought above the high that day is now losing money and the farther it drops the more likely they are to sell, reinforcing the down trend.
So for the EMini S&P futures, today’s Sell Short day reference price was the Monday high of 2590.00; we would look for a failed rally above this level for our sell trigger. Although I normally limit my stock index trading to the 8:30 AM CT to 3:15 PM session, there was a short sale opportunity overnight when it made a high of 2593.50.
Today’s 8:30 AM opening print was 2589.75 and the market rallied, matching the overnight high. It couldn’t clear it (an early sign to look to the short side?) and it dropped back below the Monday high around 9:05 and then again about 20 minutes later. I often enter these trades using resting stop orders; that way I don’t have to enter orders if a market is moving quickly.
For this trade the initial stop loss could go above today’s double top at 2593.50; we wouldn’t want the market to show enough upside momentum to go back up and take this out. In the morning Swing Trader’s Insight watch list I suggested we watch the 2585.50 level on the downside as it was a daily double top from last week.
After the 2585.50 support was taken out the market dropped to a new session low of 2580.75. It has since come back up to the broken support; we can watch to see whether this new resistance will hold or not.
Essential Guide for Futures Swing Trading
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