Monday, June 15, 2009
A very good question
Here is a 30 minute bar chart of the e-mini day sessions for the last week. I just received a very good question from one of this blog's readers:
Why did the market look different to me at 10 am New York time today than it did at 10 am on Friday (horizontal blue arrows)? The answer is actually very simple - no black magic is involved.
First of all, as I have often said, I always try to trade in the direction of the last rejection of support or resistance. On Friday the most recent rejection was of prices above 950 (red down arrow). However, the previous two days had seen a rejection of support below 930 (green up arrow). Moreover, the initial wide range up bar of this support rejection had not been completely retraced as of 10 am Friday. So I was willing to give the market the benefit of the doubt if I had other reasons to think the buyers would soon be back in control.
Contrast that situation with 10am this morning (second blue arrow). The bullish rejection was now completely retraced, thus losing all of its bullish import, while a second bearish rejection had become visible. So on this score alone things looked much more bearish this morning than they did on Friday.
At 10 am Friday I could see that the market had not yet reacted as much as it did on its previous reaction (purple rectangles). This was a second bullish point that influenced me on Friday. On the other hand, by 10 am this morning the reaction had exceeded the size of the previous reaction, a bearish development.
Another thing that led me to a bullish position on Friday was the fact that the market was reacting from a new daytime high made the previous day. It is generally safe to buy the first reaction on the way down so long as it has not developed unusual volume and isn't bigger than the preceding reaction. But this morning anyone could see that Friday's rally had halted at a lower top. This was another bearish development that was not visible Friday morning.
Finally, the rally on Friday was a very low activity rally. The market struggled upward almost all day. Today, on the other hand, the sellers were out in force and the market fell easily, another bearish development.
I think this comparison of the market situation at 10am Friday with its situation at 10am today is instructive. And it shows that trading is a matter of making common sense comparisons of market situations using the ideas I have repeatedly offered on this blog and illustrated with my own trading decisions.