Friday, January 9, 2009

Trading The Ambush

Friday was a pretty interesting day and the 15min futures chart to the left says it all. After the jobs number came out premarket the futures spiked up to the 914 area where it topped for the day. As soon as the market opened the futures just fell off a cliff. Promptly hitting lows of around 887 soon after. Much of the day was then spent consolidating and making some believe we could actually bounce. You couldn't deny that the 890 level was holding strong all day long as a good support.

I like to fade retracements after major moves and so in todays action a great setup came in the last two hours of the day. When a major move is made you can draw a fib retracement from the start to finish of the move and then monitor how the retracement acts. Usually a 50% retracement is met with a failure and resumption of the natural trend. Its in this 50%-61.8% "ambush zone" that the market makes a decision.

Today, as I have highlighted with an oval in the chart, proved to be a great short entry at the 50% retracement of the morning selloff. We tagged the 898 level and began to slide all the way into the close. As soon you you saw weakness in this 50% retrace zone then you had a great signal to short the market. If it were to continue rallying thru the 61.8% retrace red dashed line at 901 then you would have cut your losses. But the point is that trading the "ambush zone" gives you an edge and predetermines your stop loss point before entry.

Also at nearly the exact time we hit that 898 mark and pulled off it, the $TICK (which is a measure of internal market strength) showed a +1000 reading. That is a good sign to sell your longs usually or even go short.

In this example today you also had the daily pivot just above that area providing even more resistance so the short was a good risk/reward. As you can see we ended up closing near the lows of the day and in the last hour each 15 minute candlestick was red.

No comments: