Day Trading the SP Futures with Initial S/R and the NYSE Tick
October 12, 2006
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John Forman - The Essentials of Trading author
By Mike Reed
A question that comes up often is ‘Does the area of support or resistance that is hit FIRST in the morning have special significance?’
In most cases, the area of support or resistance that is hit FIRST in the morning has special significance. In the first hour of trading, the market’s reaction to initial support or resistance is a good ‘tell’ for the strength of the next move.
For instance, if the market moves up in the first 20 minutes of trading, touches the initial resistance zone, and then turns down, this implies that a good tradable downtrend move is likely to develop.
How strong that new trend becomes is market-dependent. As the market falls, its reaction to each new support zone gives an indication of how weak or strong the new downtrend is. If the market falls to initial support and breaks down through it without a stall or a bounce, it will probably continue down to the next level of support. But, if the market loses downside momentum near the initial support zone, the downtrend may well be over.
When price comes into a resistance or support area, the NYSE TICK is by far the best indicator of what price may do from this point.
What is the ‘TICK’? The TICK is simply the difference between the number of stocks that last traded on an ‘up-tick’ versus the number of stocks that last traded on a ‘down-tick’. When the TICK reaches +1000, the market has reached a short term overbought extreme and when the TICK reaches -1000, the market has reached a short term oversold extreme.
When the SP futures make a quick surge to a strong resistance zone, and then loses momentum at or near the zone, while concurrently the TICK registers an extreme high reading (usually over +1000), this sets you up for a high-probability short entry, with a hard stop just above the resistance zone.
These counter-trend trades ‘fade’ (meaning to enter a trade against the trend) the intraday emotional extremes, and may come at the beginning of a new trend - giving you a chance to hit a ‘home run.’ More often, however, they become scalp trades that don’t last long, sometimes less than a minute. Either way, they are high probability trades if you time your entry well.
It takes a lot of practice to time your entries just right on these trades, and you have to be ready to get out immediately (before your hard stop is hit) if you sense that your edge has disappeared. It is difficult to sense when the edge (probability of success) of a trade is gone *before* the trade changes from a small gain to a small loss. Practice will help *if* you know what you’re looking for.
Most traders believe you have to wait for your hard stops to be hit before you can know that a trade’s edge is gone. This may be true for most traders, but it doesn’t have to be true for you.
I’m a trader, just like you. I’ve been trading the markets for 24 years. I’ve seen traders come and I’ve seen them go. But what makes the difference between the ones who are successful, and the ones who throw in the towel? THEIR GAME PLAN!
For the past 10 years I’ve been writing a market newsletter each day, ‘The RBI Trader’s Updates’, giving my ‘game plan’ for the next trading day.
Mike Reed is author of TradeStalker’s RBI Trader’s Updates. Mike has been trading the Market for 24 years. When he got his start as a trader, Mike was plotting prices on paper tape as the internet had not yet been ‘born’ as we know it today. Years of experience have really given him a feel for the Market action. His support and resistance numbers have been published on the internet since 1996. He has a wide readership that includes day traders, floor traders, locals and hedge fund managers. His nightly support and resistance zones are specific and incredibly accurate. He offers an unlimited free trial of his nightly TradeStalker RBI Trader’s Updates.
Copyright 2006 Mike Reed
Here are some other posts which might interest you:
What does “RBI” mean?? I understand support and resistance but what is RBI support and resistance?
RBI = “Reed Buying Index”
Mike Reed being the creator. I don’t know how he calculates it, though. I do know that’s what he uses as his primary day trading indicator.