Commodity Futures Trading- The S&p 500 And E-mini - Preparation For A Big Move Up - Part 4
As traders all we really need to know is when a market is going to stop moving in one direction then turn around and head in the other. The rest is noise. I try to concentrate most of my energy on identifying these times. The day trading information presented here is applicable to longer term position trading. Read on to learn what a market requires to make a turn.
Observations From Trading Notes:
"Previous day’s close in upper range."
When the e-mini futures market is stabilizing and trying to find its legs, a close in the upper range is positive. (daily chart) It must be viewed in context. It can be bullish if it's coming off a panic bottom. But it can be bearish if a new down leg has just started. Bear markets have a tendency to get slammed in the day and rally back to the midrange at the close. They then gap down and break into new lows the next day. Know the difference and always look at indications in perspective and context. Patterns mean different things depending on where the e-mini market is within its bottom, advance, top or decline cycle.
Observation:
"A clean-out has occurred in the last 2-3 days on the five minute chart. It broke out of its down channel. This includes a double snuff of momentum. After snuff, momentum gets in sync – all on the last day."
There’s a few indications wrapped into one pattern. A clean-out is always good, especially if the e-mini futures break out of the normal channel range that you use. Channels are channels. Use whatever contains price MOST of the time and breaks out when a panic occurs. A “snuff” is my unique term for when a normal e-mini futures cycle fails to bottom, and breaks down to go twice the distance in time.
For example, lets say the S&P 500 or e-mini futures contract has been running in 30 minute advances and 30-minute declines over the last few days. Timing will never be perfect, but on average, you can see what the e-mini wants to do in normal advances or declines. The traders using optimized momentum often get sucked into these repeating and smooth reversal patterns and suddenly a large, unexpected move takes place.
Instead of the e-mini market declining for its normal 30 minutes and then rallying, it will decline 30 minutes, pause for 10 minutes and then crack wide open to the downside in a panic liquidation. The cycle will often become a 60-minute total decline to the bottom and break out of its price channel. This is a so-called “reverse energy” move. It catches off-guard the traders who got use to the repetitive cycle.
To look for snuffs all the time is a mistake. They come only about 10% of the time in normal e-mini markets and maybe 40% of the time in strong trending markets. The key is that they pause and then break the previous low made 10 minutes ago or whenever time frame you are using. They work on all time frames from one minute to monthly. Snuffs are the commodity market’s way of hogging time to accommodate the cycle of next larger degree.
You will find that when a daily e-mini move of say, three days down is in progress, the smaller hourly and 15 minute cycles become distorted and stretched out on the downside. I realize everyone has their own pet theory for this, but whatever one you use, be aware the move is fast and sudden, catching momentum-type oscillator traders off guard. You can make a whole day’s pay in a short time if you recognize what is happening.
Be aware that the e-mini futures market can disappoint many traders by breaking through an important support or resistance. It becomes a doubly important indication if a "snuff" gets involved. It’s something like a chess game, but perhaps more like a detective doing a forensics analysis. You look for many different scenarios that could play out from the evidence presented.
Never get stuck with just plan A; have a plan B also. There’s many times when I’ve worked out a scenario based on current indications only to find that it was a fantasy in my mind. I saw things that I wanted to see. My point is that when the e-mini futures market does the opposite of what you expect, be ready for it. Be quick to change your interpretation to plan B.
These plan B trades sometimes become big winners because they catch other e-mini futures traders who thought like me but were already positioned. I like to think of myself as a sophisticated trader but believe the more "sophisticated" you are, the bigger mistakes you are capable of making due to ego. Supposedly, the most sophisticated traders out there are controlling the largest positions, so things can get out of hand quickly and panics occur.
So when you see a big set up take place with huge buying and that later fails, know there are probably some big guns involved that may end up gagging on thousands of contracts. These are the types of panics you want to be riding on the correct side.
Part Five of Five Parts - Next!
There is substantial risk of loss trading futures and options and may not be suitable for all types of investors. Only risk capital should be used. By: Thomas Cathey Article Source: http://www.ArticleDashboard.com
Thomas Cathey - 27-year trading veteran heads the managed futures division of Thomas Capital Management, LLC. View his market forecast TimeLine Trading charts and get his complete 44+ lesson, "Thomas Commodity Trading Course - all free." www.thomascapitalmanagement.com/commodity/welcome.htm Main site: www.ThomasCapitalManagement.com
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