How to Shift Gears in a Fast Market
by yahoogle at TradingdaNumbas.com
Have you ever wondered why contrarian thinking works while the crowd is wrong so often when trading the markets?
For one thing, too many people getting the same idea about a certain count or target is similar to informing the enemy of a planned invasion's key details -- the when and where, the how and how many. Chances are the 'invasion' will be repelled.
Another analogy that comes to mind is that of seeing or meeting a beautiful woman -- at first, it may be tempting to think that it is one's good taste that has allowed this realization; but a deeper reflection reveals that she has already been 'discovered' in the same way by many, and is most likely 'taken'. It's the same way with the obvious ideas in market analysis -- mostly likely they are already *taken*. Then, is there a way around this 'handicap' of being late to the party? The answer experience reveals is that one has to be 'early' in developing a relationship ahead of others, thus beating them to the punch, or prize, so to speak.
An early discovery gives an edge, a head start to one's pursuit; in the warfare analogy, it would be the equivalent of the element of surprise. Of course, when I say 'early', it should not be misconstrued as 'too early', or "jumping the gun" by front-running a preconceived market move. One must first allow the opportunity to arise, both in war and love.
Such is the case with the market, which all too often becomes a careless trader's adversary, foiling his plans and crushing his hopes with daft ease. It's the environment in which cruel traps and heartbreak are born. This is where a trader has to remain vigilant, and recognize the early signs of trouble, taking the right steps without hesitation.
This last Friday presented us with compelling examples of this type of situation. The gap-up met the initial lower targets, but for some reason people wanted more, and higher targets were thrown around in a flurry of excitement. Certainly, if the gap could be maintained to propel the market higher after the open, then those ideas would have been perfectly reasonable; but it's up to the market to make or break these ideas, not to us. At the same time, we are not to be helpless as to the market's whims, as if it were a random series of price swings (although recent market action could give deceptive comfort to those entertaining such theories).
The chart I chose actually shows the globex session data, since it offers the proper context of the early Friday action. The weekend target was met, and briefly surpassed, but soon thereafter ES pulled back, with 955 making a lower high in the process. By the time of the open, 950 had become an important area to watch and maintain if the rally still had legs. Within 15 minutes, it became very apparent that ES was beginning to lose ground, and support was turning into resistance. More importantly, from the 952 es rth high, we were able to ascertain within 2 points lower that something was wrong, at an EARLY stage.
It is this sort of early-warning capability that gives us here at Trading da Numbas (TdN) the edge -- the ability to react to the market in a quick, timely, and decisive manner.
The Elliott Wave counts from the previous day still had bullish potential in them, as manifested by the gap-up, but it is always a good practice to take profits when you have them, especially when targets are being hit. The chart recommends doing exactly that, into 955, with further exits below support. Whenever the market gaps up within an ongoing impulse, one does not look for a gap fill -- unless key support is lost, that is; this illustrates how contingencies help determine proper expectations -- sizable gap-up, isn't that bullish? Yes, but... it's all contingent on holding the right support levels that TdN is adept at identifying.
Once support was lost and the 950-52 area could not be recovered, it was time to start thinking about taking short positions, as the possibility of the gap not being maintained was growing. The most aggressive one was just under 950 itself; even if one did not react so quickly, it was still possible to take a short as 947-48 was lost, in line with concurrent chat commentary. By then, the deterioration was in full swing and accelerating fast. The third entry was when 945 became resistance, again consistent with chat commentary.
The gap-fill was at 941, and it was here that we saw the first bounce since the critical loss of support. This was the perfect spot to take half off, while still riding the other half. After the 945 rejection, ES continued to drop, reaching the 933 Fibonacci support area after 10 am, looking oversold and overextended. Once it reacted there, it was time to consider exiting, especially if the daily pivot band at 937-38 was recovered, which did indeed happen.
This critical sequence lasted for a little more than 30 minutes, and it was the best trade of the day. The first hour of trading is not easy, but often offers some of the best opportunities. One can argue "How can you know a great opportunity is presenting itself before it actually happens?", but that is the wrong question to ask. It was our (correct) analysis of the market that told us that the 950 area was critical early on; and as such it was compelling enough, that not taking action would have been a mistake.
At the very least, one knew to protect their profits derived from the gap-up, while taking a short position within such clearly defined parameters only involved minimal risk, with decent reward to the downside if the gap was to be filled. In the end, it all added up to a successful and satisfying trade.
At TdN, we provide chart-based analysis and commentary suitable for a wide range of traders, from novice to expert level. Our analysis enables traders to make profits whether the market is going up or down.
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Here is a sample of our intraday Market Trend Indicators (MTIs), combined with a real-time Elliott Wave count given to TdN members this past Friday. The market turned down shortly after the chart was posted and ES went on to retest the lows of the day.
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