Not All Conventional Trading Wisdom is Correct - Part Four

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Continued From Part Three...            

Even More S&P 500 and E-Mini Futures Contract Observations:

Observation: "The following e-mini futures action turned into a big chop, then a big rally the next day: After a clean out decline, wait for a series of bottoms with big volume buying activity. Wait for the sell-off to hit a bottom, followed by a sharp rally and then the volume dies. This is the safest place to buy. This was the forth bottom and the previous three bottoms had bearish volume patterns. The forth bottom changed - it had bullish volume patterns and then price rallied to the close."

It pays to step back and view the e-mini futures market in context. My notes keep repeating it's a mistake to buy the first panic spike. I'd become good at buying spikes and wondered why I always broke even or even lost doing it. Most of the time, a huge e-mini futures climax is followed by several tries to test the bottom. It's easy to get chewed up in these bottom tests since they can last for several hours before a big turn.

The single spike low that holds and supports a big move was popular in the 90ís, but it seems to have been replaced by a series of double, triple and quadruple bottoms. Throughout the bottoming area, you will see a bearish volume pattern until near the end, where it turns bullish within the formation. Itís often profitable to stay bearish and continue to sell rallies and cover at the bottom area. In fact, EXPECT big bottoms to be tested.


If you are early buying a bottom, donít let these tests fake you out. If you are positioning long, expect them and even average in some more as long as the bottom area holds for a reasonable length of time. The e-mini market may even spike the original low by one-half to a full point, although any more usually signals a major break down. At which point, it's probably best to cash in your chips and call it a day.

Remember that "major" e-mini day-trading lows occur only every 3-5 days or longer, so be selective when positioning for them. Personally, I have found big turning point positioning to be a waste of time and money from a day-trading point of view. It often leads to overnight holds and a bad next-day gap surprise. Itís better to let the longer term futures traders beat themselves up and get the occasional rewards. Playing these large, range-bound formations from the short side until they finally end is the best advice.

When the e-mini futures market starts trending, use this larger frame of reference (the recent bottom) to pick up a bias in a certain direction. Then simply buy the dips and exit at the climaxes over and over. After identifying a big turnaround, donít try to outsmart the market by shorting or reversing your position against the trend.

This is a difficult idea to adhere to, because the e-mini market will always have minor corrections and try to fool you into believing that itís turned back down. But after the minor correction is finished, the market will move to new highs in line with the accumulation that took place over the last couple of days.

Continued In Part Five...
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