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Fortune Favours the Prepared Trader - A Good Trade Always Starts Yesterday

by Jay Patel and Kurt Hulse

The quote "By failing to prepare, you are preparing to fail" is attributed to many famous names including Benjamin Franklin and Henry Ford, and the truth of the statement has been recognized since even earlier times. For traders, approaching the market without the correct preparation is essentially preparing to fail, because it leaves them subject to bias and hesitation when they are presented with an unexpected development or a trading opportunity.

At Trading da Numbas (TdN), we follow the same ethos in our weekly and daily analysis. We show our subscribers how to prepare as well, so they are better able to recognize the signals that confirm a trend or suggest a reversal.

An important part of successful trading is about getting the trend right, but an even more important part is recognizing early enough when one's first assessment is wrong and then acting upon that realization. This allows one to be more right than wrong in terms of overall points collected over a period of time. Keeping any strong bias against the trend usually is the trader's worst enemy, holding the person back from achieving consistent success. On the other hand, correct preparation helps the trader apply objective tests to the market, thus keeping bias at bay.

In this article, we describe some of the expectations we had for March and how preparations and research helped us identify targets and "must-achieve" market levels. These preparations helped subscribers at TdN stay on top of the many turns that March has provided already. At the conclusion of the article, we also describe a special limited-time offer to those who would like to try our market analysis and real-time market monitoring services.

Many traders have noticed the market's tendency to make a strong upward move on the first working day of a month. In fact, as part of our analysis at the end of February, TdN presented subscribers with statistics showing that during the prior 24 months 83% of "first days" had printed more upside than downside in the S&P 500. However, we also mentioned the price levels that would have to be attained and defended by the bulls on March 1 if the market was in fact going to go up. Knowing these levels, our members knew how to detect the failure of the upward trend that was apparent from the prior week. This left them prepared either to protect their positions or to take advantage of the upside failure, since they knew that losing ES 1,319 and 1,314 would expose the 1,300 area for a retest. (For clarity, all prices in this article are expressed in terms of the June 2011 ES contract unless stated otherwise, although some of the original forecasts referred to the March 2011 contract or the S&P 500 index.)

With the significant drop on the first day of March, many traders turned bearish -- claiming the first working day set-up no-longer worked and looking for moves lower. To the contrary, we noted to TdN subscribers that the onus was on the bears for the next three days at a minimum. Statistics from prior years showed that subsequent moves of 18 points higher had printed during five similar occasions in recent years, but moves of 10 points lower had occurred only twice.

The move higher into Thursday, March 3 was consistent with the expectations based on the preparations. However, prior to the market open on Friday, we pointed out that the upside move in the index was inconsistent with influential volume and internal issues and that it was lacking strong leadership. If that was the case, then the first targets lower that bears would be looking for were in the 1,300 area for a retest of earlier lows. This printed on Monday, March 7.

Since the first weekend in March, TdN had highlighted that the week of March 7-11 was all about creating a perception for the following week of March 14-18. During the weekend research it was noted that "bears have no room for complacency here and this week is going to be all about the prior low at 1,294.25" [March contract, equivalent to 1,289.50 in the June contract]. We provided alternative and complementary research showing how, on previous occasions, the changes of the Monday in such a week had created a direction that lasted through the week in previous occasions. Thus, any weakness from Monday was likely to carry through into the rest of the week. The price level mentioned above was the minimum that bears needed to attain in order to stay in the game, and it printed to the exact tick on Thursday morning.

Waking up on Friday to the news of disaster surrounding Japan and a significant gap down in futures, we noted that any open at those levels would effectively be under the auspices of a second consecutive gap-down day, and while this is uncommon but not rare, the size of the two gaps in question was something to watch for. As market action was occurring in relation to a natural disaster crisis, TdN pointed out that it was something that does not normally get taken advantage of, but that instead fosters togetherness and support from all factions. Thus, risk was for gap fill and higher prints. Consistent with our expectations that morning, the ES contract bounced 25 points from the Globex low.

Preparation for the week of March 14th as being the most important week in the first quarter's calendar has started at least a week earlier, even before the crisis in Japan had taken place. The weekend research had warned that if any traders were under the assumption that it would be a calm and collected week then they would be in for a shock. The key on Monday was about holding above Friday's prior lows, but bulls needed to push above 1,307.50 whereas bears would get another chance if the 1,291.50-1,293 area was converted into resistance for an initial test of 1,282. The level held as support and returned to the 1,291.50 area at the close. Tuesday again saw the Globex Session plummet lower and unable to recover the 1,266 area. With FOMC due on that day, it was clear there were conflicting forces at work in the markets. However, we brought to our subscribers' attention that, although the day would account for significant intra-day volatility, we also expected that order and responsibility would be shown by the influential parties within the market. TdN members were looking for a higher low in the opening session on Tuesday, followed by action through ES 1,266 and 1,269 that squeezed volatility out and ground up in a sideways pattern leading up to the FOMC news release. The announcement popped the price to the 1,283.75 area before pulling back.

With FOMC out of the way the day's preparations had highlighted that bulls would prefer a bounce from the 1,269 area if tested. Otherwise they would be looking nervously at a test lower in the 1,266 area where they were subject to being taken hostage by the bears. It was noted that Geithner was scheduled to speak during the day. Although the 1,269 area provided initial support, bulls only made it to the 1,276 area, and the subsequent failure on a retest meant the 1,266 area was again exposed. Just as Geithner was scheduled to open his gob, the 1,266 area was retested from below before breaking sharply lower through 1,247, followed by a swift recovery that stayed just below the 1,266 area before leaking lower with traders wanting to avoid the overnight risk. For Thursday TdN was prepared for the extreme prints in sentiment as measured by VIX and put/call, and in conjunction with a major futures and options expiry we were wary of a bounce higher. The low print of the prior day had tested significant support levels on some wider time-frames. The move higher into the open of Friday's session resulted in a test of 1,285.

By avoiding a directional bias, the traders at TdN are able to identify potential changes in trend and stay in the right direction. This is something that was routinely emphasised by Dominic Mazza at his website, Trading the Charts, and it is a mindset we continue to encourage at TdN. As some readers here will remember, Dominic passed away quite unexpectedly in October 2008. In his memory, TdN is offering a limited time trial subscription for 3 weeks at $30.00. All proceeds of the subscription will be donated to Dominic's family. Please follow this link for details.

Although the start of this article began with a quote from Benjamin Franklin, a fitting way to end this article would be using one of Thomas Jefferson: "I find that the harder I work, the more luck I seem to have."

 


This is a small example of what goes on at TdN on a day to day basis, helping traders prepare for each day and improve their skills over time. For more examples and articles, visit www.tradingdanumbas.com.

 

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