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Day trading the SP 500 e-mini

Introduction

For anyone who was long stocks, the dramatic sell-off that began Tuesday must have come as a shock. There were lots of hints that the market was near a top, but the size and speed of the correction took many investors by surprise. The likelihood of continuing volatility will only increase anxiety in the coming weeks.

But for futures traders, volatility is an opportunity for increased profits, and most made out like bandits last week. Naturus was on vacation the first two days, and out of the market for the dramatic one-day drop in the S&P. But even without the potential profits a big daily move offers, her calls for the rest of the week (see item #7 below) gave the best results for three consecutive days in almost a year.

The utility of futures trading is the ability change directions quickly, to offset losses in other parts of the market. Last week showed the value of that strategy.

Here’s the outlook for this week.

Outlook for the week of Mar. 5 – ESH7

1. Friday prices

 

Open

High

Low

Closing

1399.75

1405.25

1385.00

1385.75

2. Major support and resistance for Monday Mar. 5

 

Resistance

1393.75

1397.75

1402.25

1409.75

1416.75

Support

1379.75

1375.75

1368.50

1362.75

1357.75


3. Weekly outlook

 

Before last Tuesday (Feb.27), the S&P 500 was holding on to its gains, the Nasdaq Composite was trading near a six-year peak, and the DJIA had not had a 3% correction intraday in more than three years.

All that has changed. Last week the S&P 500 gave up all of its gains for this year, and the Dow was down for three digits. Sell order overloads caused the NYSE computers system jam, and led the Dow to plunge another 200 points for closing.

In only one day, approximately $600 billion in market capitalization was wiped out. Even with the modest recovery in all markets on Wednesday, Tuesday’s damage was bigger than we imagined possible. And over the next two days, all three major markets lost more ground; the weekly closes were down more than 4%.

Lots of pundits blamed the melt-down on the Chinese market, but anyone who could not anticipate the correction — those who believed this market could go up forever — should only blame themselves

The signals were clear, as we warned in previous trading plans, and in the week of Feb. 20-24, all markets gave huge warning signals that a significant downside correction in the ES contract was unavoidable:

  • A narrow weekly range with lower volume on upside movement;
  • unable to breakout 1465 level for 7 days;
  • and always closed below 1465.

All this was clearly telling us this market was unable to move higher. The March contract didn’t signal the high, but the June contract clearly told us on Feb. 23 and confirmed by Feb. 24 that the high was in. Inexperienced traders often neglect the importance to of the next contract, but rollover day is Thursday, and by the end of this week the June contract will be the dominant instrument in the futures market.

Now the damage has begun. We are only seeing the first impulse downside movement, but more is on the way soon. All last week the ES sold off in the afternoons. The ES has a very short-term oversold condition and a bounce  should be expected Monday and Tuesday if the 1371-70 level holds.  The ES could bounce up to its 20 weekly moving average line for testing before it starts to its second leg down.

But for the longer term, we have just seen the start of the party. Weekly indicators have just started to turn down and there is lots of room for a downside move. The first real solid support is around the 1320-1312 range, but we have two gaps around 1368.50-1372.50 (Nov.6/06) and 1359-1361.75 (Oct.12/06) that need to be filled first, and may offer temporary support.

Our trading strategy still is SHORT ON BOUNCE until the trend changes.

Weekly major resistance level 1416.50 and Support level 1359.

Weekly chart:

Stock Charts

4. Daily outlook for Monday.

Last Friday, after first hour trading, the buying power disappeared again. Sellers kept selling off in orderly manner and sent price to the low for closing, a typical bear market move. Today we may see bounce again if 1381.00 level can be held up. If ES can hold 1381.00 level, and push price above 1393.75, we may see prices move to the 1400-1397 range to test last Friday’s breakdown level. 

Daily indicators are mixed. That is because ES is in first stage of downside. Denial from bulls and awakening from bears create high volatility in the market.  So far the buy-the-dip attitude from Bulls probably hasn’t changed very much. Therefore, bounce should be expected in the coming few days, unless price falls below 1379 level, when another selling panic will be created.

Daily chart:

Stock Charts

 

5. Trading strategy for Monday, Mar. 5

Last Friday we saw a last hour sell off again. ES closed around 1385.75, just two ticks above its Friday’s low. This morning we may see continuation on downside. Within first hour, 1381-79 range is key range. As long as this range can be held, ES may reverse its direction. Pay attention on first hour trading range. Range breakout method applies if there is a breakout after the first hour. Today’s key level is 1445.25

6. Intraday swing position entry

 

Intraday swing position entry on short side:
1396.50-1398.75 (scalping) and 1404.75-1406.75 (agg) and 1409.50-10.75(cons)
Intraday swing position entry on long side:
1377.75 (scalping) 1372.50-68.50 (agg) and 1361.00-1359 (cons)

 

Intraday chart:

Stock Charts

7. Results last week

Weekly summary: calls for w/o Feb. 26/07

Type

Number

Outcome (points)

scalping calls

29

90.25

position swing calls

5

46.75

method calls

3

17.75

What does this mean? See this explanation.

To see the trading plan for Tuesday, Mar. 6, contact