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

[bthomas]

The Trade Remains To Sell Into Strength

F2 Comments: Market rallied early and did get to the best structural sell on the charts at 115-055/095. The high at 115-08, a market number, was predictable. It was all selling thereafter and the market closed weak. Open Interest (OI) increased in both the ZN and ZB implying new commercial sales. The close was weak. The trade remains to sell into strength and will until the focus shifts from the size of the upcoming debt issues to deteriorating economic activity. Some news to influence Monday’s trading: Construction Spending is expected at -.8% and ISM Index at 42.0. Want to sell early strength and see if 112-20/22 can be taken out. If it holds, will cover and look to reenter short at a higher level. 1st sell 113-15/19. Back up sell 113-27/31. Cover if 112-20/295 holds.

 

[bthomas]

Market Slow Pre-Election

F2 Comments: A pretty quiet day in the Bond market when all was said and done. The Bond found buyers below 113-00 and a sellers above 113-16. The ES was sideways/lower, but didn’t break. The Bond closed in a P pattern, pointed higher. If the ES breaks, the Bond should retest resistance before support. Some news tomorrow: Factory Orders is expected a -.8%; Auto/truck sales have been called as low as 11.1 M to as high as 13.0 M. That said, the ES’s direction should give us our first trade in the AM. If the ES is sideways to lower, want to buy the Bond and see if 113-20/28 can be taken out. If it holds, will look to the short side of the market. First buy zone is 113-05/09. Back up buy is 113-01 OB. Reverse, if 113-20/28 is rejected.

 

[bthomas]

Post Election Prep

F2 Comments: The market traded higher off its opening and continued to trade as the day progressed. The market paused at 114-00 +/- for an hour and then exploded when 114-12 came out. There was no news to tie to the breakout buying. Short covering? New buying? Will find out tomorrow. Some news to absorb tomorrow. ADP Private employment Survey is expected at -100K and ISM Services at 47. Hard to say how the election will play. Can make a case for either side of the market for both candidates. Want to buy early weakness and see if 116-00/06 can be taken out. If this area holds, will start to look at the short side of the market. First buy zone is 115-09/13. Back up buy is 114-29/115-01. If 116-00/067 holds, will look for a place to get short.

 

[bthomas]

Friday Is The Biggest Scheduled News Day Of The Month

F2 Comments: Had guessed a trading range day for today. Sell off got a little deeper than thought, but not really a surprise given the volatility we are currently experiencing. At the day’s end were looking at a double distribution/saddle formation, which favors another trading range tomorrow, if not for the news. Tomorrow is the month’s biggest scheduled news day. NFP payroll is expected at -200K and Unemployment at 6.3%. Will play the first corrective reaction w/the news. If the range isn’t extended, will exit the trade.

 

[bthomas]

Avoid the Chop - Identify Consolidation Early

On Friday, November 7th, there was a nice sell-off after the release of the NFP number. The typical way to trade an important news event is to wait for the first setback and re-enter in the direction of the newly established trend. The setback should be a minimum of 6 ticks (32nds).

At 9:26 eastern, the first setback occurred and 4 ticks was achieved, but should you then look for continuation, consolidation, or retracement? Your first clue is the setback bar. If that bar closes (in the case of a down trend) above the high of the prior bar, it signals the temporary end of the prevailing trend.

So momentarily, at a minimum, you will be looking for consolidation or retracement. At 9:30, there is a retest of the low but it occurrs on less bid volume than when the low was put in originally at 9:26. You can see this by looking at the volume histogram in the first panel under the chart.

The retest bar is thin, indicating low volume, the mode (where the highest volume of trading has occurred) is high on the bar, and the bar itself closes on it's high. These are all indicators of a lack of continuation. And they all occur at around 116.10, a historically high volume area. See the historical histogram on the right side of the chart. This histogram represents volume from the last 30 days of trading.

Remember the #2 rule in the 3-2-1 methodology. High volume acts as both support and resistance. If a high volume area isn't penetrated, you can expect consolidation for a period of time. In this case the range from 116.07 to 116.13 held for 30 minutes. And you can see that there is no real buying interest by watching the histogram under the chart.

When 116.07 is finally broken at 9:56, the conservative approach, to lessen the chances you're being faked out by a false breakout, is to wait for a retest. The retest occurs on relatively high volume at 9:59. Your entry is when price trades out the bottom of that bar.

As you can see there's alot to consider and analyze, but you should know by now that successful trading is alot more than two lines crossing.

 

[bthomas]

Conditions Favor a Trading Range for Monday

F2 Comments: Great news this morning in the Unemployment numbers. Bond hit 117-28 off of the headlines and promptly reversed when the ES didn’t break. The ES was sideways and the Bond sold hitting 115-22 before the selling was exhausted. It was a sideways market thereafter w/a seller above 116-12 and a buyer against the buck. When the market closed, the analysis was split. This favors a trading range again Monday. No news to drive the trading. The focus should be the direction of the ES. Can see two trades on Monday assuming the ES is sideways. A sell against resistance at 116-20 or a buy against 116-00. If ES is higher, can sell the Bond. If lower, a buyer of the Bond. Buy zone is 115-29/116-01. The sell zone is 116-19/23.

 

[bthomas]

Follow-Up to a Trend Day

F2 Comments: Another day of strong buying. Only thing missing was volume. The market is experiencing large swings almost every other day on low volume coupled w/strong buying or selling. If all the players were in the market, these large swings would be dampened. No news to influence the trading on Wednesday. The Chinese stimulus program of 568 B was behind the stock market buying. The realization that the stimulus would flow into the market over the next two years curbed the buying enthusiasm in the ES, which basically sold off its opening. The strong close in the Bond suggests higher prices on Wednesday. Want to buy early weakness, if the ES is sideways to lower, and see if 118-08 can be taken out. If 118-08 does hold, will look to the short side of the market.

 

[bthomas]

Market Break Related to 10-Year Auction

F2 Comments: It was a pause day punctuated by a 10Y Note auction. When the retest of 118-22 held, the market transitioned into a range trade driven by technicals for support/resistance and the ES for the direction. The sharp break from 118-14/16 to 117-17/18 was auction related, IMO. By the end of the day the profile was a P. The market is poised to trade higher w/some help from the ES and it was selling on its reopening. Some news tomorrow: Jobless Claims is expected at 480K and Trade Deficit at -56.8B. If as forecast, the news is supportive for the financials. If the ES is sideways to lower, want to buy early weakness and see if 118-22/24 can be taken out. First buy zone is 116-05/09. Back up buy is 117-29/118-01. Exit and or reverse, if 118-22/119-01 is rejected.

 

[bthomas]

Retail Sales and Michigan Sentiment on Friday

F2 Comments: The market did try to trade higher and did hit 118-20 for the third time. Resistance held and the market reversed and began to sell. The selling accelerated after the 30Y auction and further increased when the ES rallied back to 910. The ES drives the trading in the ZB. The Bond is pointed lower w/some help from the news or a reversal in the ES. Tomorrow’s news---Retail Sales is expected at -1.2%; ex-auto at -.9% and Michigan Sentiment at 57.0. Want to sell early strength and see if 116-00/04 can be taken out. First sell is at 116-27/31. Back up sell is at 117-03/07. Cover, if 116-00/04 or 116-14 then holds.

 

[bthomas]

Volatility Up - Conviction Down

F2 Comments: One day down a couple of points. Next day up 2.5 points. Volatility is up and conviction of direction is down. This has been the case for the last 6 weeks and is likely to remain such until the recession takes hold and the financial system stabilizes. The day finished strong. Some news today: NY Empire Index is expected at -26.0; Industrial Production at -.1%; and Capacity utilization at 76.6. Want to buy early weakness, if the ES is sideways to lower, and see if 119-00/04 can be taken out. If resistance holds, will look to the short side of the market. First buy zone is 118-05/09. Back up buy is 118-01 OB. Exit and/or reverse if 119-00/04 holds.