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

[bthomas]

Retests of Prior Highs/Lows Provide Excellent Trading Opportunities

When the market, any market, makes a new high or low and pulls back from that level, it creates the potential for a failure. The attached ES chart from Monday, December 8th provides us with multiple examples.

We like to see a minimum of 3 to 5 bars between retests so some white space is created. The retest is seldom to the tick, but should be in reasonable proximity. If the level holds, the bar that created the retest, or the succeeding bar, should close opposite the direction of the retest.

This powerful strategy typically creates multiple opportunities each trading day.

 

[dunadain]

What about constant volume bars? Woudn't they show the same support/resist points?

 

[bthomas]

I use constant volume charts for trading the Bond and, yes, they do show support and resistance points. What many find helpful is seeing the volume traded on each bar, represented by the width of the bar, and the location of the mode. The mode, represented by the magenta line, shows which way volume is building.

 

[bthomas]

Preparing for the Market Open on 12/10

Here is an example of Charles Cochran's commentary to the TM room in preparation for the open on 12/10.

06:55 - The bond was sold off its session opening and hit yesterday’s #2 support point at 133-28, which held. The stock markets round the globe are up off the information that the Big Three Detroit auto makers will get a bailout loan package as soon as today. Will this be a rumor fact situation for the ES? The question of the day, IMO. The Bond can use some volume between 133-20/24 and 134-16/20. Market looks like it will fill in volume until the auto loan bill issue is resolved. Volume is once again very light OVN in all contracts. Seems like a good portion of the market has been forced to or have chosen to close their books. That can work for us as we know how the professional market likes to force the price activity. See a trading range day again until the ES’s direction is resolved. Want to get long in the 133-21/29 area and looking to sell the 134-11/15 area early in the session.

 

[bthomas]

Retest - Failure in the ES

The attached chart containes examples of two trades that occur with regularity in the ES and the ZB.

The first, and most predictive is the Retest - Failure. In this trade, the market makes an intraday high or low, then some time elapses (usually 3 to 5 bar is desireable, but not mandatory), after which a retest occurs.

If the intraday high/low is rejected, watch for a bar that moves away from the retest and closes at it's extreme.

The second trade happens when the intraday high/low does not hold and the market trades through it. Price then comes back to test the breakout level, fails and then trades in the direction of the breakout. Again, a bar with a close on it's extreme is needed to enter.

Watch for these in the market you trade.

 

[bthomas]

Another Retest - Failure in the ES

Yesterday I posted an example of a retest - failure trade in the ES. Here are two more trades of the same nature a day later

The setup is the same regardless of the market you trade. The market trades to an extreme, pulls back, and then retests that level.

If the breakout fails, fade the retest with a bar close on its opposite extreme.

One of these trades each day can get you your business plan. Two is gravy.

<img src=http://elitetrader.com/vb/attachment.php?s=&postid=2217388 width=800>
click on attachment link to enlarge image

 

[bthomas]

Charles Cochran's Comments After Friday's Market Close

F2 Comments: End of the week(EOW) profit taking was the feature. The OVN session was higher off the break in the ES. The market failed on the retest of the OVN high in the day session setting up the spill from profit taking. The trading was erratic and whipped around by comments out of Washington and large players entering and leaving the market. By the day’s end we had a saddle formation that still favored the buyers. If the market can’t take out 135-08 on Monday, I would expect new selling to re-enter the market. Some news on Monday: NY Empire Index is expected at -27.0: Net Foreign Purchases at ???; Capacity Util. at 75.9; and Industrial Prod. at -.5%. Can sell failure at 135-00/08 or buy early weakness at 134-09/13. Will update Monday morning.

 

[bthomas]

Fed Announcement Day

F2 Comments: Another day of buying. The market almost hit Friday’s high at 135-27 w/a high of 135-26. The close was strong. The market analysis favors higher prices tomorrow. Some news to affect the trading. The focus will be the FOMC announcement where the Fed is expected to cut rates 50 bps. The CPI is forecast at -1.%; core CPI at .1%; Housing Starts at 730K; and Permits at 700K. Expect a relatively quiet session. Want to buy early weakness and see if 135-26/28 can be taken out. If not, will trade from the short side of the market into the FOMC announcement.

 

[bthomas]

12/16 Recap

F2 Comments: The market was on hold through the FOMC announcement. The two buy zones we noted both produced two good trades each. Support held and short covering into the FOMC took the market to 139-025. The day session close was 137-12. If the buying doesn’t continue early in tomorrow’s session, I would expect the market to consolidate and perhaps trade back to 137-08/12. No news to drive tomorrow’s trading. There is some volume late at 138-24, 138-12/16 and 138-00. See the first buy zone that offers some potential at 138-08/12, then 137-12/16. These levels area stretch too. Will assume that the OVN session will yield some price points that will line up w/today’s post day session buying.

 

[bthomas]

Charles Cochran's Comments After the Market Close on 12/17

F2 Comments: The market held the gains plus some from the Fed’s announcement to support the markets through monetary, interest rate and balance sheet policies. The market needs to trade higher to hold the recent longs in their positions. Otherwise, consolidation is likely. Some news to impact tomorrow’s trading. The direction of the ES will also come into play. Want to buy early weakness and see if 140-08/125 can be taken out. If 140-08/125 holds, OK to get short. First buy zone is 139-01/05. Back up buy is 138-09/13. Will adjust after the OVN session.