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Be ready to trade both ways, even in a bear market
With equities showing more determination to head downward, as we have been warning for several months, TOTM has watched the S&P, Nasdaq and the Dow walk in an orderly fashion down the staircase of successive support levels. This has presented fantastic opportunities for swing trades to the short side, and many of our members who trade on a timeframe of days-to-weeks have made a bundle. We also have helped our day-trading members stay on the right side of the market throughout the journey of the past several weeks. Consistently, our real-time analysis has many members making their monthly dues back in a single hour or less.
So, why do some traders lose money, even in a strongly trending market like this? A big part of their difficulty comes from bias, which is a danger that traders are especially susceptible to when they think they know the direction the market is going. As a trader, taming your bias means learning how to make the distinction between understanding where the market wants to go in the bigger picture and understanding what the market is doing "right now." It's probably one of the hardest aspects of trading to master, it's one of the biggest reasons why having intraday guidance can be helpful to you as a trader.
A perfect example of our real-time analysis happened last week. Equities had slid sharply downward during the prior week, and then Monday (Veteran's Day) produced a holding pattern. Would bears jump back on the sled on Tuesday? We thought the chances were good; in fact, we thought ES was probably somewhere in the middle of a third wave down, from an Elliott Wave perspective. However, even before Tuesday's market open, we identified 1365.50 as support that would have to be lost in order for bears to continue their journey.
For an intraday trader, the ideal short trade that morning would have involved waiting for 1365.50 to be broken and then retested from below. What we got instead was ES trying to form a higher low above the previous night's globex low.
Tuesday, Nov. 13: Correctly taking advantage of a bounce during a bear week
As the upward move progressed during the morning, we were able to identify targets which were hit and then overcome successively. We also had mentioned 11:00 as a likely time for an intraday inflection, and in fact the upward move stopped and reversed at about 11:10. Price met the next of our targets at 1384.50, poked a little bit above, and then lost momentum. The target level was a good place to exit and watch for further developments.
So, what besides the 1365.50 level would have caused a trader to enter long? Well, every trader has his or her tools, but our Market Trend Indicators certainly provided a strong signal in this case. Note how the indicator for the 3-minute ES chart was hovering near the bottom of its range on Tuesday morning, until the big move started. Then it provided the signal. (The MTIs are available to all of our subscribers 24 hours a day for many different markets.)
Even if you didn't catch the initial upward move, the market presented you with two more intraday buy signals shortly thereafter. First, price climbed above the 20-period EMA on the 60-minute chart (a very important moving average). Second, price poked above the 1374.25 resistance level and then retested it from above. That was the ideal second entry point for a long trade.
Now, after the morning move was completed and the 11:00 time point was met, was there any merit in looking for continuation through the afternoon? One of our chatroom members asked just that question, and the moderators pointed out that NQ looked pretty weak and had failed to keep up with the morning move in ES. In fact, NQ looked like it was ready to continue its series of lower highs and lower lows.
What was the lesson for an intraday trader? At a minimum, a bearish trader should have stood aside in the morning and avoided taking a short position. More nimble traders took the buy signal as a scalp to the long side. (That is, if you can call 20 ES points a scalp. That's $1,000 net for a single ES contract.) It is very important to pay attention to how the market behaves at support and resistance levels, especially at the beginning of the day. It also helps to have reliable levels to use as the launching platform and the target, and TOTM provides those consistently.
A similar trap was set for bears on Friday. Those looking at the morning's action right from the open saw ES declining sharply at the end of an overall bearish week. And certainly there were one or two good morning trades to the short side. However, TOTM also warned its members that Friday was likely to present a larger change in trend. That combined with our working Elliott Wave count led us to believe that the market was probably verging on being oversold.
In addition, the OEX (S&P 100 index) looked like it was presenting a terminal pattern - a wedge or ending diagonal.
Friday, Nov. 16: OEX saying the down-move was nearing an end
Early in the day on Friday, our analysis mentioned that we would want to see 1350 overcome as confirmation that a temporary low was in. In the meantime, trading was a matter of looking for good entries to the short side (there was a really good one just below our 1350 level) or bottom-fishing for a turn at one of the lower support levels.
Friday, Nov. 16: Many entry opportunities in both directions
Even before the confirmation for longs provided by the 1350 level, the fast Market Trend Indicator produced great signals throughout the morning (in both directions!). Observe the indicator at the bottom of the MTI below and note where the fast (white) line crosses the colored signal line. That's the entry signal. Our MTI didn't get fooled into signaling long when ES had its first morning bounce; in fact it produced a short signal a bit below 1350 at around 11:00 a.m. However, the MTI was really the champion in calling long after the market found its real low of the day around 11:30 a.m. The color change of the signal line from red to green and the color change in the price bars above that show when the signal presented.
No doubt many bearish traders were caught by the short squeeze as the market bounced on Friday. That's how bias can hurt you. Meanwhile, TOTM was looking for an interim low.
To be fair, many traders out there are operating on outdated information. Using a weekly newsletter can be great for guiding you in swing trades, especially if you have deep pockets or are not trading highly leveraged products. However, anyone trying to trade intraday based on weekly advice is fighting a losing battle. If that's you, let us help! Take advantage of our month-long trial membership for just $30 and get full access to our analysis on ALL timeframes ranging from months to minutes, plus access to our live trading room.
Trading futures and options involves the risk of loss and is not suitable for all investors. Nothing in this article should be construed as a recommendation to buy or sell financial instruments.