January 6- Breakout Buy in EMini S&P Futures

The EMini S&P futures had a breakout setup for Friday, which made sense in light of the monthly employment report due today. The breakout setup gave a good trade for the day session after a fake out in the premarket.

Thursday’s bar for the S&P was an inside day, NR4 and a doji. These were all patterns indicative of a market lacking in conviction, which would be logical ahead of the monthly employment report. In keeping with the lack of directional clues, I approach breakout days willing to take a trade in either direction- let the market decide which way it wants to go, we go along for the ride. ( In this morning Exclusive Advisory I noted ROC was bullish- something to give confidence for the long side.)

For today’s trade, our upside breakout reference prices were the Thursday high of 2266.00 and the Wednesday high of 2267.25 – we would look go to long if the market traded above these price(s).
I suggest waiting for the 8:30 stock market open to take trades and today was a good example why. After the 7:30 employment report there were two moves above the Thursday high (double top at 2266.75) however this move lacked momentum and the market fell to a new session low of 2258.25.

This session low was made just after the 8:30 however it too lacked momentum, and the rally resumed. Around 9 AM it reached the Thursday high and 45 minutes later it began to move above the highs. Although they were all close, at this point I would use the premarket or Wednesday high as the reference price for an entry point, in order to have confidence in the uptrend.

The initial stop loss for our longs could go either below 2261.00 (the last swing low) or the session low. By 11 AM it reached the previous contract high at 2273.00, eventually making an intraday double top high of 2277.00.

January 6 – Taylor Trading Sell Short Day in T Bond Futures

Treasury Bond futures had a big rally on Thursday as they rallied out of Wednesday’s breakout pattern. This gave them a Taylor Trading Technique Sell Short day signal for Friday

Treasuries (Bonds, the 5 and 10 Year T Notes as well) had a breakout pattern Wednesday. They all showed range contraction from Tuesday as well as a Doji Bar, which indicate a lack of participation and lack of commitment to buying higher or selling lower, which would be needed to create a daily trend.

Breakout setups are often resolved by a big directional move in the following session, as traders decide on a direction, which pulls in more trade interest, setting up a positive feedback loop. That’s what we saw in Treasuries Thursday – they opened near the low of the range and rallied over the session, ending with a close near the daily high.

In the session following a breakout move I normally anticipate a Taylor Trading move in the opposite direction, so in this case Thursday’s breakout rally meant we would anticipate a Taylor Trading Sell Short day for Thursday. We look for a Sell Short day because the breakout rally of the previous day tends to create an “excess high” (to use the Market Profile term) that ends up marking a top and a trend change down.

The Taylor Trading Sell Short day tells us to look for a failed rally above the previous day high (the “reference price”) with the move back under the reference price being our signal for a short sale. Thus, for March T Bond futures we would watch 153-00 as our reference price today.

Bonds did have a rally and a sell signal before the employment report. I don’t like to take trades into major reports so I passed on this trade. My thought is that the result of a report tends to be a 50 / 50 proposition, and I’d like to take trades where I think I have better odds than that. Additionally, a report like NFP often causes the kind of “excess moves” we look for, and looking for trades after a report allows us to exploit other traders’ mistakes.

The initial move after the NFP was a rally back above our reference price and then the session high (153-05) to make a new high of 153-09. This rally failed as well and the subsequent drop back below either today’s lower high or the Thursday high could be used as a signal for a short sale.

The initial stop loss would go above today’s high of 153-09. We would hold shorts only when the market shows downside momentum and a new high would negate the bearish trend.

Bonds sold off in the wake of the employment report, making a series of lower highs to make a session low of 151-29around 8 AM (This was just above Fibonacci retracement support at 151-28). This low held until 9:40 when stocks finally rallied above their Thursday high (S&P futures have a breakout setup for today.