Wednesday, January 17, 2007

Tom's Trades - Day Trading by AMBUSH!

BONDS

MARCH 30 YEAR T BOND

The daily chart sure made our call look good, but in actual fact the market moved so fast on Friday that we couldn't get a trade off. Rates fell steadily right from the open and didn't even flinch at the 111-00 line, our first action line, and simply continued lower to our target at 110-24 before holding up. The Bonds spent the rest of their time in the 110-24 region not doing a whole lot for the remainder of the day.

Given the strength of the line at the 110-24 area I'm going to toss this number into the mix along with our usual xxx-00 and xxx-16's that we normally play. The market is in a steep decline and I think we could see 110-00 before it finally bottoms out, at least for the short term.

So to start off Tuesday I'll be watching how the market continues to play 110-24. Err on the side of caution and wait for a retest if necessary before selling. There was a lot of pounding going on here so you should look at a possible buy if we rally back to the 111-00 line.

CURRENCIES

MARCH CANADIAN DOLLAR

The Canadian Dollar responded much better to our numbers last Friday. The market opened just above the 8525 line, which was the "new" number for the day. From here we saw rates dip slightly a few minutes into trading only to shoot higher through 8525 again. Given how quick the rally came I thought I had missed the move, but then we got the good ole retest at 8525 – just like it was supposed to.

From here the market once again turned higher and allowed me to buy in at 8535. I wasn't too disappointed at the "sloppy" fill as the steady pace easily allowed me to bring stops to breakeven. Even if you didn't get a chance to buy in off 8525 the CD did give another chance off our second line at 8550. This retest was a little quicker however, so you had to be on your toes to get it.

Stop management is a little trickier now. While it is tempting to leave the stops at breakeven (and probably safe to do so), it's probably more prudent to bring them under the 8550 support. Remember the Once Broken Theory – that once an area of resistance is broken the market should not reverse back through it.

I'll be playing the 8550 line again for Tuesday, so even if we do get stopped out we have a chance to re-enter. To the upside it looks like 8615 is our next area to be wary of. There's also the other side of the small gap from January 2 at 8600, so you might want to add that one to the list as well. While I don't think we'll see it, 8525 is still on the table for a move lower.



MARCH SWISS FRANC

The Swiss Franc was paying off like a loose slot machine last Friday. Our short from 8060 was at breakeven and we had 8025 in our sites as a profit target. The market opened quietly but then broke down hard through Thursday's lows wasting no time getting to the 8025 support! The speed of the move caught me by surprise, but I was still above to exit with decent profits.

Now that I was wide awake I was intently concentrating on the 8025 line. The market gave us a half hearted retest over the next 15 – 20 minutes but only got as low as 8032 before setting in another rally. If you recognized the move higher, what Tom calls "whispers", as the end of the retracement you could have bought the run to 8075, but don't feel bad if you missed it. While it was an impressive move, it was difficult to catch as rates whizzed right through anything resembling resistance until it got to 8075.

Our lines for Tuesday come at 25 point increments, which is typical of the currency markets. We'll start off the day playing the 8075 line which is followed by 8100 and finally 8125. I'm favouring a move to the upside, and this would be my preference.

The downside might see a retest of the 8050 line, which would give us an excellent opportunity to buy higher from here. While that is the ideal, a breakdown would bring 8025 back into play.




INDICES

MARCH MINI RUSSELL 2000

The Russell's range looks impressive on the daily, but truth be told it was very difficult to capitalize on the move. Friday's session began with a slight rally bringing the market to the 797 line, the one I was watching like a hawk to sell, remember? I got my wish as the market retreated from the resistance, retested, and fell off again. The move was short lived however as the Russ "felt" the 792 support early and bounced from 793, tagging me for a small loss in the process.

From here we saw another run to 796.50 (ie. 797). This time I was looking for the possibility of a breakout and got one after the brief retest of the resistance area. Rates chopped around considerably for the next couple of hours, leaving very little of my finger nails. I was more than a little relieved when we finally saw the 796.50 line hold the second time and rally higher from there. Before the close I brought the trade to breakeven, but forgot it was a holiday weekend in the US. It would have been much more prudent to exit, but there's not much I can do about that now.

For Tuesday I'll be paying particular attention to the 803 resistance and won't be shy about exiting here, or on the first sign of weakness. With the 805.50 resistance just above here I have to admit I'm skeptical about the upside for the beginning of the week, but long term might be a different story. Of course a breakout higher and subsequent retest should be bought, no matter how queasy it makes you feel.

While I don't think we'll see a full on reversal to start next week, but a dip to 796.50 – 797 would not be out of the question. Watch for the test/retest as a sign the support will hold before setting up for the next buy. Of course if the floor falls out, then 792 is going to be in play.



MARCH MINI $5 DOW

The Dow had my number on Friday as I was unable to ride out the choppy ranges that started the day. I was long from 12580 and hoping that we wouldn't see the index slip too much lower, but the quick move to 12550 stopped me out of the trade. Now I was lost until we saw something at 12600 or 12474, both of which seemed way out of reach for the day.

Of course I was wrong as the market made a big move to 12600 on a gap. From here we got a couple of retests. I bought the second one, not know that there would be a third, but all worked out okay as rates continued to climb to the end of the session. Given that this is a long weekend, I think I'll bring stops to breakeven (12610) for Tuesday, just in case we see a bigger than expected reversal.

12600 is obviously the monster line in play for Tuesday as is 12580. To the upside we have the contract highs at 12652 (ie. 12650) which are likely to have something to say about where the Dow is going. I'm favouring a reversal on Monday but with the recent strength you can't rule out a rally, but I would be suspicious.




GOLD

FEBRUARY GOLD

Gold began Friday right on schedule. The market rallied smoothly from the open and I thought we were going to get a good opportunity to work the 617 line, that was until the market blasted right through the line all the way to the 620 resistance! From here we saw prices contend with the 620 resistance and I was torn whether to buy or sell as I knew the market could go either way. Normally I would have preferred to short, but the quick move that got us here had given the market a bullish flavour.

I actually got a little luck with Gold as we had a test and retest of the 620 line. I was all set to sell the next bar lower when prices blew back to the 617 line. I wasn't prepared for such a large move and was quite relieved to see it was short lived as prices spent the next 20 minutes back at the 620 line.

We eventually saw the 620 resistance give way and break the previous high at 621 before stalling at 622. I set up to buy a breakout above 622 and got the fill less than 10 minutes later. Prices didn't look back at this point which made it very easy to bring the trade to breakeven on the next leg higher. I subsequently rolled the stops to the 625 resistance on the way up. Prices never got low enough to stop me out, but I had no intention of holding Gold over the weekend, so I exited before the close.

To start the week we will be paying particular attention to the 625 – 626 region again. From here the market could fail and send prices back to the 620 and maybe even 615 support. To the upside the first number of consequence seems to be 630 after which we'll be keeping a close eye on 637.




EDUCATION

The Concept of Test and Retest

You will hear me refer to test and retest a lot in my analysis in reference to how the market responds to a particular line of support or resistance. This concept is the cornerstone of our trading methodology since we "react" what the market does, rather than predict what it will do. The best way to understand how the market is reacting is to use the test/retest principle.

As support and resistance traders our job is to find the most influential lines of support and resistance and then trade off of them. Regardless of your time frame, the principle remains the same. What most people do wrong however is that they try to determine the strongest lines in the same time frame they are trading. This is not possible. While the current time frame might give you hints as to strength, you should be looking at a longer time frame to determine your action lines.

If you are day trading then you should be gathering your information from the daily charts, not the intraday. The intraday charts are where you initiate and manage your trade, but all your action numbers should be predetermined from the daily chart. Likewise if you are a position trader, you should be getting your information from the weekly chart, which is the next longer time frame. The weekly chart will give you your action numbers which you trade on the daily chart.

Okay, now that we now how to determine our action numbers, how do we establish a test and retest. Fortunately it isn't as difficult as it sounds. Remember that we are trading strong numbers. As a result, when a market breaches a strong area of resistance, it will have a tendency to retest that area to make sure that the breakout is valid. This retest is normally our best opportunity to enter a trade. Why? Because the breakout has already validated the direction and the retest is confirming the breakout; therefore we have a good opportunity to get into a market with minimal risk. Some diagrams should help clarify the principle.

Let's assume that prices are rallying and quickly approaching an area of resistance. It might look something like this:



When the market approaches the resistance it can do one of two things: it can break through, or it can bounce. Depending on how it reacts to the resistance level will determine how we react. So since we know "something" will happen here, we are on the alert to either buy or sell.

Now it is common to want to buy/sell the first breakout/bounce, and sometimes that is all the market will give us. But more often than not we will have a test followed by a retest of the resistance which gives us a better opportunity.

Let's see what a breakout followed by a retest would look like:



A bounce is very similar. While most times you would be tempted to sell the first bounce, often the market will retest the resistance before committing to the downside. A bounce with retest would look like this:



Of course the exact opposite is true if prices are coming from above into support. Sometimes a market will give you several tests and retests before finally committing and other times it will only give you a one bar retest but the principle remains the same. Papertrade it for a while and you will see that it is true in all markets and in all time frames.