The 'shaky hand' trade. That tells you all you need to know. If you're still taking 'comfortable' trades, you're setting yourself up for failure. Here's how to know the difference and how to capitalize on them.
It was a shaky hand for the buyers, indeed. First the market went quiet and lulled the short sellers to sleep. Then it had a quick ten minute rally that stopped them out for a loss. Next, the market did a clever thing. It caught the “longer term” futures traders who were still short. The advance-decline line was still down around 2:1 negative AFTER the initial rally. This can happen since it takes time for stocks to get up past “unchanged” for the day.
I noticed the latest cycle changed character and bottomed out early. It made an early bottom with right translation, which is bullish. This is like trying to hold back a stressed dam. When the cycles bottom early, there’s no stopping the next move. The futures market cleverly crept slowly higher to disguise its next move. This gave more eager traders plenty of opportunities to get short. But, it was stingy when it came to letting it be bought. Does that tell you another bullish clue?
The next move up was breathtaking. The market fulfilled its job of rewarding the traders with the shaky hands. The commodity traders that caught the falling daggers earlier were now smiling. But the comfortable short traders who thought they had a sure thing were in shock.
To become a better futures contract trader, spend time developing your own ideas of what makes a vulnerable market situation. The market has many ways to lure traders into thinking they are in a safe trade. I know a few smart traders who use simple trend lines and moving averages. Why? They use them to see what the majority is seeing and exploit the failures. It’s the same with basic momentum indicators. All this stuff works when the markets are acting normally. But the times when these commonly used indicators fail are when the fast panics occur. You can sometimes make a few days pay in minutes.
I talk about market "snuffs" in one of my free Thomas Commodity Trading Course lessons on the S&P 500. This is exactly what vulnerability is all about. It's the majority expecting a futures market turn to occur, but the turn fails and price continues in the same direction. It’s the reverse energy of a cycle failure. Or it’s the move when the momentum bottom fails to turn a market. Or it’s a broken trend line that has been in effect for a long time. Remember that these failures work in the minority of cases. You have to be selective and have other evidence supporting them.
All major turning points start out with sharp moves as viewed from the smaller degrees of price action. This is the “kick-off.” Whatever time frame you are looking at, there is a micro and macro, from one small tick to centuries long.
Always be aware of the context or degree of price action you are studying when trying to exploit failures. If you are studying a minor turn, which later turns out to be a major turn, the futures price action within the minor turn will be much amplified and distorted. Use these clues to access what you may be dealing with in the future. It can give you information of how much strength or weakness to expect in the next move.
Good Trading!
There is substantial risk of loss trading futures and options and may not be suitable for all types of investors. Only risk capital should be used.
