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Trading setups
Inthis chapter we're going to get right down to brass tacks and go overin detail the exact, precision trading setups we use to nail 8-10 pointmoves in the S&P 500.
This chapter is going to require studyand practice on your part. At first, you may want to have thisinformation readily available at your trading desk, until these setupsare committed to memory and are fully "automatic."
Subscribersshould memorize and learn these setups as a core strategy for using21st Century Futures Morning Call. It is imperative that you know thesesetups cold, and take the trades when appropriate during the tradingday even though they may not have been specifically mentioned in thatday's Morning Call.
These are the daily setups we will be watching for, which I'll break down in more detail below:
Breakout Buy
Breakout Sell
Breakdown Sell
Breakdown Buy
Buy Pivot target -- Buy
Buy Pivot target -- Sell Reversal
Sell Pivot target -- Sell
Sell Pivot target -- Buy Reversal
+5/-5 (or inverse -5/+5)
+10/-10 (or inverse -10/+10)
Beforecharging into these setups you have to first know our definition of theall-important HOUR ONE PIVOTS: The Hour One pivots are the highest highand the lowest low made on the e-mini S&P500 during the first hourof regular trading (9:30am to 10:30am Eastern Time). These price pointsare a vital part of our daily methodology. They are dynamically createdmarket pivot points, newly formed each trading day during the firsthour of trading.
We call the first hour high the breakout(abbreviated B/O) and the first hour low the breakdown (B/D). We willonly be trading at these pivots after the first hour has completelyfinished, after 10:30 Eastern Time. You'll find more details on this inChapter 4.
1) Breakout Buy: On Breakout Buys we are lookingfor the market to be sneaking up into a sizeable bullish move for theday. We want to get on board before the markets show their bullishcharacteristics to the public.
Here's the method: First,determine the Hour One pivots. After 10:30am, we are looking for theHigh (the Breakout) to be the FIRST of the Hour One pivots to hit. Atthe time of the Breakout, we then examine our "HIGH FIVE" (see Chapter5) to determine whether to do this trade.
If at the time of theB/O the Dow is FLAT (which by our definition means the Dow is up 50points or less) and the NAZ (our nickname for the Nasdaq compositeindex) is leading the market up 12-15 points or more (subject toperiodic retooling) PLUS we have a TRIN below .80, the VIX lower(ideally by -.50) and MER not down over 1.00 -- then we buy the B/O atthat price as the market trades through it to the upside.
A stop is placed 6 points below the B/O price and moved up 1 point for every 3.5 points of profit.
Aswith all our trade setups, our profit target is 8 to 10 points,depending on the recent range of the market. If the average 10-dayrange is over 18 points, we'll be looking to hold for the full 10points. Below that, and we'll look for 8 points.
Caution: If theprice runs up 5-6 points in favor of the trade and then comes all theway back to the entry price, then we move the stop to 2 points from theentry, and leave it alone. Usually when this occurs there is a higherlikelihood of getting stopped out, but our trade setups are so powerfulthat we need to give them the benefit of the doubt, as often it willend up working out anyway.
2) Breakout Sell: If the abovesetup is NOT OCCURING for a B/O buy then we will under mostcircumstances (but not always) be looking to Sell the Breakout of thefirst hour's high. This is simply a matter of looking at the High Fiveplus the Dow to see if the circumstances are calling for a BreakoutBuy, or a Breakout Sell.
In other words, when the first hourpivot is hit, we're almost always looking to take action. That's ourdecision zone. We're either going to buy the B/O with a bullish HighFive, or we're going to sell the B/O if the High Five isn't confirmingthis specific bullish setup.
Example: The Dow has rallied +70points at the time of the Breakout, but the NAZ is only up 8 points,the TRIN is trading at 1.02, the VIX is flat to slightly up, and MER isdown .80. The market has just hit the B/O, as the first of the Hour Onepivots to be hit. This is obviously not a setup for a Breakout buy, sowe therefore will be looking to SELL at that B/O high as the pricescross over that specific level.
Special note: Frequently theHigh Five will be showing bullish or bullish/neutral characteristics.When this occurs we will then look to add 2-4 points to the Breakoutprice and sell in that 2-point zone. This leaves the entry on the shorttrade up to the discretion of the trader, attempting to get a betterprice then simply shorting at the EXACT B/O price.
Also notethat the method is designed to hold a 6-point stop from the exact B/Oprice. When a trade is entered adding +2-4 points we will then use a6-point stop from the entry, but look to move it as soon as possible tothe exact 6-point stop from the original B/O pivot number.
Profitgoal: 8-10 points to the downside, using the same range criteria asmentioned above for determining whether to take 8 or10 points.
3)Breakdown Sell: These are rare days when we determine the trading dayto be BEAR UGLY. We call it this when we find ourselves saying "thiscould get ugly today" as we watch the markets gap lower on the open,with bad news all over TV and the wires, and the Dow and NAZ gettingslaughtered. We all know what these days feel like.
Once thesecharacteristics are in place and you see the High Five exhibiting BearUgly readings, you can confidently short the first hour low (Breakdown)for a move 8-10 points lower than that first hour low. These are oftenvery difficult trades to make psychologically. After entry, this tradeneeds to be held through all the market noise, and often you'll findyourself having to hold short into the last hour and often into thefinal closing minutes for the lowest prices.
Method: Monitor thefirst hour of trading and note the Breakdown price. If the High Five isreading Bear Ugly, then short at the B/D price when the market movesthrough it, making that the first pivot hit of the Hour One pivots. Usea 6-point stop above the entry at the B/D and plan to hold short allday. Move the stop 1 point for every 3.5 of profit.
Look to holdout for 10 points of profit, but during periods of larger ranges in theS&P500 -- with 10-day average range greater than 20 points -- lookto hold out for more points. During more volatile periods you can holdout for 15 points of profit, or on exceptional occasions you can lookto take 20 points of profit when the price action and volatilitydetermines this to be a good strategy. We usually will alert you tothis being possible in the daily briefings.
4) BreakdownBuy: Under most circumstances we will look to buy the breakdown whenthat is the first pivot hit of the Hour One pivots, as the B/D sellsare rare.
Look to buy the B/D when the market is NOT exhibitingthe Bear Ugly characteristics described in trade setup #3. If the HighFive are decidedly bearish (but not Bear Ugly, of course) then look tosubtract 2-4 points from that low and create a buy zone in that range.Again, this will give the trader some discretion in an attempt to get abetter, lower price to buy the B/D, and this may or may not besuccessful in entering a trade. It takes time, practice and skill tolearn this, just like any other skilled endeavor.
Method: As themarket approaches the B/D as the first of the Hour One pivots after thefirst hour has transpired, look at the High Five to determine if a BearUgly day is setting up. This is usually apparent from the opening asdescribed under trade setup no. 3. If not, then buy at the B/D price asthe market trades at or below that price. If the High Five or yoursense of the market from reading the Morning Call tells you that youcould get a better price, then look to subtract 2-4 points from thatlow and buy in that zone.
Hold the trade with a stop 6 pointsbelow your entry, but watch the 6-point stop price from the exact B/Dprice. Ideally the lower price movement will not violate that stop. Youshould not risk more than 6 points from your entry on this trade. Holdfor 8-10 points depending on the current market range.
5)Buy Pivot Target -- BUY: On this trade setup -- which is usuallyspecifically recommended in the daily Morning Call -- we want to buy atthe exact Buy Pivot target. A small one-point window is used. A +4.25stop/pivot is used as a gauge to determine if the market is going toreverse to the downside by violating the 4.25 stop/pivot. We will usean actual 5-point stop on this trade to give the 4.25 pivot a few ticksof "fudge factor," as the e-mini has a strong tendency to overshoot bya few ticks. Usually the downside blowouts occur when the price "blowsthrough" the 4.25 stop/pivot in a decisive way, and doesn't justcasually pick off the price by a few ticks.
Method: If theMorning Call is recommending to buy the Buy Pivot, then we will look tobuy it at the first price shown on the price zone. This way we'll besure to get into the trade. Ideally if you can get the lower price ofthe zone, it'll be a little bit better. In the Morning Call we have aspecial section where we give specific instructions for the pivot.
Usea 5-point stop below the lowest number on the Buy Pivot and look totake between 6-10 points of profit depending on the Headline Call, thecondition of the High Five, and overall market sentiment.
6)"Buy Pivot becomes Sell resistance with a Bearish High Five." Thisone's a mouthful, but you want to know this setup cold, because it'svery reliable. On this setup, we will be selling the Buy Pivot Targetafter the market has blown through the stop/pivot reversal.
Theseare very reliable trade setups that occur when the market has movedbelow the -4.25 stop/pivot in a decisive way with a bearish High Five.We are then waiting for a REFLEX RALLY off the lower price to REVERSEAND GO SHORT at the original Buy Pivot target (the lower number). Whenthis occurs we will be using a very tight stop because when this tradesetup works out correctly there is usually very little pressure on thestop above the original Buy Pivot. We will use a 3-point stop above theoriginal Buy Pivot.
Method: Usually in the Morning Call we willsuggest to watch the Buy Pivot for reversals. If a bearish marketoccurs and the market sells off through the -4.25 stop/pivot in adecisive way, then we will be putting in a limit order to sell at theoriginal Buy Pivot price. If the market makes a reflex rally back up tothat point and triggers our Sell then the stop will go 3 points abovethat entry.
Example: Buy Pivot is 923.00-924.00. -4.25 stop is918.75. Prices drop fast upon approaching the 923.00 level to 916.50after stalling just under the 923.00 pivot. Place a limit order toreverse and SELL at 923.00 with a stop at 926.00.
Profit goal:On these reversals we look to patiently hold out for a 10-point movebelow the original pivot. In our example 913.00 would be the profitgoal after getting short on a reversal rally back to our short entry at923.00.
7) Sell Pivot Target: This is traded usually upon arecommendation in the Morning Call for that day. As in the Buy Pivotsetup, we will monitor a +4.25 stop/pivot above the Sell Pivot targetand use a 5-point stop above the top price. We also use the +4.25 inthe same way as the Buy Pivot target to determine if we should reversethe trade when the price blows through the pivot with a correspondingBullish High Five. Profit goal on these trades is 6-10 points dependingon the market conditions.
Method: As per the Morning Callrecommendation, we would look to sell the Sell Pivot target when itoccurs and place a stop 5 points above the highest number. We wouldexpect the +4.25 stop/pivot to hold back the buying and contain theshort. Profit goal is 6-10 points depending on the current range andmarket conditions.
Sell Pivot becomes buy support with a bullish High Five...Buy the SellPivot on a trade through stop/pivot reversal. Here, in the same way asthe Buy Pivot target reversals, we are looking to see if the pricesrise rapidly and blow through the +4.25 stop above the Sell Pivot. Upondoing so, and with a corresponding bullish High Five, we would look toREVERSE and buy on a reflex pullback to the Sell Pivot target. A tight3-point stop is used below the original Sell Pivot price.Example:Sell Pivot target is 927.00-928.00; +4.25 stop/pivot is 932.25. Pricespush above the 928.00 price and then rapidly trade higher to 934.75. Weplace a buy limit order at 928.00 and a stop at 925.00. Upon entry at928.00 we would look for 938.00 as our 10-point profit goal on thetrade.
9) +5/-5 Intraday reversal (or the inverse --5/+5):These are signals that we watch intraday that can indicate a largereversal in the market. This trade setup occurs when the market isTRADING FLAT for about 5-8 one-minute bars, and suddenly the priceshoots up 5 handles in 5-12 minutes. If the price then RETURNS TO THEORIGINAL PRICE IT RAN FROM in about the same amount of time (or ideallyLESS time), this creates a Sell trade at the original "flat-line"price. In other words, you sell at the price from which the marketrallied 5 points and then returned to.
Example: prices on theS&P500 e-mini have been trading in small, tight bars for the last 6minutes ranging from 923.00 to 925.00. Suddenly within 3-5 minutes,prices have shot up to 929-930.00 and within 6 minutes are trading backat 923.00 again. Go short at 923.00, place a stop up at 929.00, andhold short for 10 points lower.
Note: usually when this occursit is such a rapid movement that unless you are aware of this setup andwatching for it, the trade will get away from you. Rarely is there anypressure on the stop as price usually falls off right to the lowerlevels. This type of trading pattern is usually the sign of a rig inthe trading pits where some large local was able to temporarily movethe prices up and then get short. Other times it's not such a rig, butmerely a case of a lot of traders ready to sell at the higher price.This can also occur when there is a "gunning for stops" at obvious stopaccumulation points
The reverse of this is the same trade, withthe --5/+5. When prices are trading flat then quickly run 5 pointslower, then rally right back to the original point, this is a Buysignal right after the quick recovery as prices return to the originalflat-line spot.
10) +10/-10 (or the inverse --10/+10):This is the same as the +5/-5 except on a larger time frame and on alarger reversal scale. When we see prices move up 10 points and then ashort time later come all the way back down10 points, we will often seenot only intraday reversals but also find the price reversal CARRY OVERTO THE NEXT DAY.
The inverse relation is also there with a lowermove of 10 points in the early session followed by a complete recoveryof those 10 points, and more. Very often the next day there will be arally day under these circumstances.
Example: The market istrading on the open near 923.00. During the early session the pricespull back substantially to 913.00 but then a few hours later theyreverse and are now trading back up to 925.00. This is bullish goinginto today's close, and is usually bullish for tomorrow as well.
Everyday is a little different in S&P500 futures trading: One of thegreatest secrets to success in using our methods is to remember thateach day is different. There are no pat formulas or methods that aregoing to work all of the time in this game. It is about taking fullresponsibility for your trades and learning how to survive and prosperin the markets. Our trade setups work very, very well in a consistentway. The key is to train and develop YOURSELF to also work in aprofessional and consistent manner.
"To be successful you haveto be willing to constantly re-evaluate what you are doing and beinnovative in your trading ideas. I think the most successful tradersare always retooling their market theories. They are alwaysre-adjusting their strategies to current conditions and perceptions. Ithink everyone else is kind of one step behind. You need to first beable to analyze what is absolutely relevant right now. It may bedifferent tomorrow. The worst thing is to become complacent. There arealways ways to improve what you are doing and the methodology by whichyou do it. Be prepared to work very hard. Remember the people you arecompeting against. You're going against the very best and it is acompetition.
-- Peter Malmut, 3rd generation currency and S&P500 trader
Sample:
Headline Call:
Open below 994.00 and early lower run will see market move higher mostof the session. A higher opening above 994.00 and an early run up willbe bearish for lower prices today testing below Tuesday's lows of 988.00
| ESZ03 S&P500 E-mini Futures | ||||
| Prev Day - SP |
| TCF Key Numbers for ES | ||
| | | | 1,014.00 | Pit Bull MA |
| High | 1,001.20 | | | |
| | | | 1,000.75-999.75 | Sell Pivot |
| Open | 1,000.30 | | | |
| | | 996.50 | | |
| Close | 994.10 | | | |
| | | 989.90 | | |
| Low | 988.00 | | | |
| | | | 987.75-988.75 | Buy Pivot |
Recap of Tuesday's Action:
Good Morning and thank you for joining us today.
Onour Headline Call we were looking for the market to move higher off ofan early, fast,lower drop which is what we got on Tuesday. We had alsomentioned that the market would experience weakness later in thesession.
Ifyou had decided to follow this idea early on the lower fast spike downto the area we mentioned Monday for support (985.00). There was a goodchance to get long below 990.00 looking for a rally either back up tothe sell pivot target or up to the BreakOut which occurred later in thesession. Working both sides of this Headline Call with 2 trades wouldhave produced up to +14 handles depending on your entry and exit.
The"Buy Pivot becomes Sell Resistance" trade did not set up as the marketdid not reflex rally up to 995.50 within a timely manner. On these typeof reversal trades you want to see the market hit the --4.25 pivot,blow through that price, and then reflex rally back to the Buy Pivottarget which has now become resistance. This reflex bounce should occurusually within an hour or ideally much less. The idea is there is areflex bounce by the wrong way dip buyers. In Tuesday's market theysquashed em hard through this 992.00 area quickly, did not reflexbounce but headed lower to test the lows, and then slowly moved up allday.
Wehad mentioned in the "Pro Trader Action" section that, "if we get afast, early drop within the first 20 minutes or so of the session thenwe should see prices drift higher again" meaning back to test theinfamous 1000 handle. That area was the B/O on Tuesday and just poppingslightly above it they fell off that mark again.
Wewill now be watching today's action with special attention once againon the opening price to determine if we will get a full on Sell Off daytoday or an aberration on the sell pressure which would coincide withour recent rolling to the Buy Mode. In this case we would see pricesstart to move higher again today. Here is what we would look for.
Today's Call & Briefing:
Today is a double sided Headline Call.
Mindyou this is not a "hedge" in any way but merely a call on the marketsdirection depending on how they open and move within the first 20minutes or so of the session.
Ifwe get a lower opening and early push lower (the expected action) thenthis will produce a similar result to what we saw on Tuesday with thehigher drift upwards most of the session. An opening and early movelike this would "feed" the Buy Mode that the TCF Market Forceindicators are in now. We just had a recent rolling over to the BuyMode a few days ago and we are now expecting a larger scale up day tooccur anytime.
Ifwe get this lower opening and early run lower this will assist the BuyMarket Force and will be looking for higher prices. Most likely if thisoccurs we will see a BreakOut rally occur on Thursday or Friday and nottoday. Now keep in mind, coupled with this we are now heading into thefirst day of the month and the period around a new month tends to bebullish.
Ifwe get a higher opening above 994.00 combined with an early higher movein prices then this would "feed" the Sell force on a one day basis fortoday. In such a case we would expect to see prices drift lower intothe close taking out the lows of 988 on Tuesday's action.
Weare more inclined towards expecting to see the early lower action. Nowthe tricky part is that we can often get a SLIGHTLY higher opening butthe immediate lower squash in prices. This is OK for feeding the buyforce. We try to give you the idea of what needs to occur to affect theprices. IDEALLY we get the lower opening price but this may not alwaysbe the case but the idea is that they head lower FIRST to feed the buyforce. The real key is the speed and direction of the first major movein the market of 5-7 points or so.
Thesecret to seeing the underlying new Buy Mode functioning fully is tofind any lower price moves today or this week getting bought up andHOLDING ABOVE 995.00. If this occurs then the next move up will be tohold above 1003-5 and then test the 1014.00 area which today justhappens to be our friend the Pit Bull.
TCF TRADE SETUPS TO WATCH FOR TODAY:We first want to see how the market sets up for today on the openingearly direction. If we get that lower action then we are going to belooking to buy the BreakDown.
Asmost of you know who are experienced at reading our Morning Callnewsletter we would cancel buying the B/D if the market was Bear Uglywith some really strong, negative news coming out that was shocking themarkets.
A quick note on Tuesday' opening trade action:The initial lower opening and drop on Tuesday was NOT a Bear Uglymarket. Although the Bear Ugly readings on the High Five were there andthe gap lower the ingredient of strong, negative market news was NOTthere at all.
Thedrop on Tuesday was only related to some news about Sun Microsystemsand then a bit later the consumer confidence and Chicago PMI numbers.These regular industry type news surprises rarely will constitute aBear Ugly day as they are common, frequently rigged numbers and eventsanyway.
Pleaseturn off that stupid CNBC and all that emotional hype coming out ofthat station. It only will distract you from the reality of our TCFsetups. You have to always remember that that station is PAYED to keepyou GLUED TO WATCHING THEIR STATION and they do that by constantlyrunning this corny, football game, Ra Ra type approach creating falsedrama at every second to keep you hooked in. Has nothing to do withprofessional trading. Ignore the news and pay attention to the correctTCF setups please. You will thank me later. After years of watchingthat noise I finally turned it off many years ago and have not missed athing. You can turn it on when something dramatic appears to behappening. Then turn it right off again as soon as you find out whatthe big deal was and get back to focusing on the one minute candles andthe TCF setup.
Areal Bear Ugly day has a heavy feeling to it that is associated withnews that is more related to a broader fear spectrum. Remember, withour TCF Bear Ugly setup we are asking the market to be in such badshape that it is going to give us 8-10 handles lower move BELOW THELOWS put in the first hour. That has got to be a very sick marketsituation...one that when you see the market open up gap down anddigest the news you say to yourself..."things could get Ugly here".Then you think, "Sell the BreakDown". Not some common news about somestocks screwball accounting or some common market report.
Wewill also be on the lookout on a Higher Opening and early run up toSell the BreakOut which, if the proper ingredients are there forselling as described in the Trading Handbook, would see the prices selloff the B/O and test that 988 area again.
Value Area: 989.90 - 996.50
Ona lower opening and early move lower let's see if we can get somesupport here at the 989.00 area for the move up here at the bottom ofthe VA. It may be a little too close to the closing price so we may getthat lower testing of the 988/lower early on to find the supportaction. Trading back up and holding above the top of the VA is abullish move.
Buy Pivot Target: 987.75 - 988.75
Notrade at this pivot today. Watch the -4.25 stop/pivot at 983.50 to setup this lower testing zone of support we want to buy into. Match thisup with the BreakDown and we should see em support the selling here ifthe B/D is in this same zone.
Sell Pivot Target: 1,000.75 - 999.75
Notrade at this pivot. If we do get the expected higher prices off theearly lower move then they may be able to test this upper Sell Pivottarget and take out the +4.25 stop/pivot at 1005.00 and head higher.
10 Day "Pit Bull" Moving Average: 1,014.00
Ifwe can pop out of the 1005 area then we are on our way to testing thisupper 14 level. They should stop up there today if they get going thatstrong and then it will become a "line in the sand" for the rest of theweek. So far the expectation is NOT for a strong week but more of aneutral to higher week. Strength could show up next week after everyonegets back from our
Pro Trader's Action
Today could be a little bit tricky so just watch the opening forclear cut directions on which way to hit em. An early drop shouldproduce a bullish result unless something Ugly happens. This is notexpected on the first of the month. I get the feeling we need to reallyhit that original projected 985.00 price before this lower testing isover so the early drop could take us down there and lower testing that-4.25 stop/pivot on the Buy Pivot target. So try and grab em there ifthe B/D is matching that area.
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