The 3-2-1 Approach: A Simplified Method for Trading Any Market

Charles Cochran's Comments and Preview of Friday 10/17

F2 Comments: Another trading range day w/a P formed after the support at 113-08/12 was retested and held. The early news was supportive, but ignored. And in M period a possible MoM emerged taking the market to our #2 support zone. This is a great buy spot, if the market doesn’t break. Some news tomorrow to impact the trading. Housing Starts is expected at 880K; Permits at 845K and Michigan Sentiment Indicator at 69.0. Doubt if this news will have much affect on the market. The ES’s direction is likely to be the most relevant factor. IF ES is sideways to lower, want to buy 113-17/21 OB and see if 114-00/08 can be broken. If not, will look for a place to short the market.

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Preparing for Monday 10/20

F2 Comments: Market did rally off the Housing Starts news. Fundamentals played until the ES recovered from its lows, The fundamentals have been generally set aside. We were looking for a new move to start out of the 114-08 level and it did today. This will be confirmed if the selling continues next week. Only LEI on Monday and it is expected to come in at -.3%. Want to sell early strength and see if 112-16 can be taken out. If it holds, will look to the long side of the market. First sell zone is 113-07/11. Back up sell is 113-19/23. Cover and or reverse, if 112-16 holds as support.

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No News On Tuesday - Watch the ES

F2 Comments: An interesting day. Support was found early in the session and the market did rally to 113-25 before the day session closed. The profile was a weak “P”. The market is pointed higher w/some help from the ES. If the market can’t take out and hold 114-08, the market can turn quickly and retest 112-16/20. No news to drive tomorrow’s trading. Focus should be the ES’s direction. Can see a buy early in the session to retest 113-28/114-00 and/or higher. Or can sell failure at 114-00/08 in anticipation of a retest of 113-16/20 and/or lower. First sell zone is 113-27/31. Back up sell is 114-03/07. First buy zone is 113-17/21 w/a back up buy at 113-09/13.

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Still Looking to the ES for Direction

F2 Comments: Strong market to the upside today. It broke out when 114-01 fell and the buying wasn’t over until 115-19 was touch and retested. The market moved into developing value and traded 115-07 for the rest of the day. The analysis favors a retest of 115-19 tomorrow. No news to drive tomorrow’s trading. The focus should be the direction of the ES and it closed weak to boot. We want to buy early weakness and see if 115-19 can be taken out. If not, will switch to the short side of the market. First buy zone is 114-29/115-01. Conservative buy is 114-21 OB.

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Strong Close on Wednesday - Buy Early Weakness Thursday

F2 Comments: The buying in the ZB stalled through the H period as Tuesday’s strong buying was digested by the market. When the last attempt to break the market stopped at 115-07 failed, short covering and new buying entered the market and the ZB hit 116-16 before the buying stopped. The close was strong. The market is pointed higher w/supportive news and ES action. Jobless Claims is expected at 475K. I want to buy early weakness and see if 116-16/20 can be taken out. IF not, will exit the trade. First buy zone is 115-29/116-01. Back up buy is 115-21/25. OK to turn seller, if 116-16/20 is rejected.

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Sell Monday if ES is Sideways to Higher

F2 Comments: The market sold after a strong rally from weakness in the world’s stock markets. When the selling in the ES stopped, it began in the ZB and was not over until 117-00 was hit. The analysis favors lower prices w/out news. Little in the way of news to drive the markets on Monday. New Home Sales is expected at 450K. If the ES is sideways to higher, want to sell early strength and see if 116-24/28 can be taken out. If it holds, will cover and look to the long side of the market. Aggressive sell zone is 117-07/11. Back up sell is 117-19 OB. Cover, if 116-24/28 holds.

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Follow The Volume For Trading Success

On the attached chart I've marked off the high and low volume areas to illustrate how price is attracted to these areas. But the most telling area is that which occurred from 11:37 to 11:44am.

As you will note, price traded through the low volume area of 118.16 and was moving up to the next high volume area at 119.00. But look at the histogram in the first panel under the F3 chart. Ask volume hit it's peak on the 11:37 bar and began to retreat, even though price continued up for another two bars.

Price double topped at 118.275 and a rotational arrow, deceleration square and deceleration diamond appeared on the 11:44 bar. The mode was formed at the low of the 11:44 bar and price closed 4 ticks off the low of that bar. When price traded out the low of the 11:44 bar, it was time to enter short the market.

The market them spilled from 118.215 to 117.14, allowing you to achieve a 4 to 6 tick business plan. Watch your volume both from a historical perspective (histogram on the right side of the chart) and from that most recent in the market's memory (the histogram under the chart).
 

Attachments

FOMC Week

F2 Comments: The Bond was higher when the ES was being sold and lower, when buyers took the ES to 890+. The late break in the ES once again brought buyers into the Bond. The focus remains the ES’s direction. FOMC week in the Bond. Tomorrow’s news Consumer Credit doesn’t usually change things. Think the focus will remain the ES. IF ES is lower, can buy the Bond. And if higher, can sell the Bond. The structure slightly favors lower prices tomorrow. Based on the ES’s direction I can sell 117-15/19 or buy 116-29/117-01. The ES should hold the key for tomorrow’s action in the Bond market.

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FOMC This Afternoon

F2 Comments: The market sold OVN, rallied into lunch and broke and took out the OVN lows after lunch. Try making longer term calls on the direction of the market and where you want to engage the market from the short side. Aint easy, to say the least. Today’s weak close favors a sell in the OVN session and probably a buy in tomorrow’s day session. Tomorrow’s FOMC meeting should keep the market in a range. IF 115-12/20 holds OVN, will start to look at the long side of the market. Some news to influence tomorrow’s trading: Durable Orders is expected at -1%; crude inventories are expected to build; and the FOMC announcement is expected to show a cut in rates of 25 to 50 bps. First sell zone is 116-11/15. Back up sell is 116-23/27. Cover and/or reverse, if 115-12/20 then holds.

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Prepare For The 5 Year Bond Auction

F2 Comments: Market traded both ways today. Biggest trade came from the short that set up above 117-00/#3 R. The setup was a retest of 117-035. The market was quiet up until the FOMC cut rates by the expected 50 bp’s. When it became clear that the ES was not going to break off of the rate cut, the selling poured into the Bond w/114-28 touched before closing at 115-01. Some news tomorrow: Jobless Claims is expected at 475K; GDP at -.5%; Deflator at 4.0%. After the news is out of the way and the ES has settled into its day the 5Y auction will start to influence the trading. I think the bond will trade up into the 5 Y auction after establishing a low in the OVN or early in the day session.

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