Afternoon,

First off, before I get to the update, I had an interesting question from Ephraim that I thought you might like to see. Here is the question and my answer.

Hey Ron,

Do you treat the 1st hour high and low the same? Do you consider both of them a big support/resistance level?

A:

Hey Ephriam,

Yes, I do treat them the same. I read a book a while back called “Mind Over Markets” by James F. Dalton, et al. I would not recommend it as it is a bit more complex than I like. But one of the main ideas I got form the book was that there were two types of traders that control the market. First the market traders and what he call the other time frame traders. Basically, the first hour of trading establishes the equilibrium of the market. There are traders from all over the world that have been trading our market and other markets over night (the globex market). They take control for the first 30 minutes. Then the dominant traders have control for the next 30 minutes. That establishes the first hour. The what the book calls the other time frame traders decide if they think the market is fairly valued or needs to go higher or lower. A break of those important levels (the first hour high low) will usually determine the direction of the market for the day. One last thought…after the first hour high or low is taken out in the opposite direction (in other words, lets say the days first hour low is taken out and trades below the the first hour low for a while and then breaks back above the the first hour low), the market usually (about 85% of the time) will go back to the first hour high. Kinda cool, huh!

Well, that’s a long explanation of what could have been a very short answer. But I thought you might like to know what goes into the various rules of my system.

So, now you can see why I treat the first hour high or low with so much respect.  Now on to the update.

The last few days have been a little bit different. I am not sure why. I have a suspicion that it has to do with the fact that the market participants want to take the market higher but the problems that are out there (sub prime worries, over $100 a barrel oil, and the up coming elections, just to name a few) are keeping traders guessing as to the next direction. Fortunately for us, it really does not make any difference which way they take it as long as we have a little patience and a few rules to govern our trading. Today we had 3 valid set ups. There were 2 winning trades and 1 break even trade. Here are the first and second half charts:

First Half

Click on chart to enlarge.

Second Half

Click on chart to enlarge.

A couple of comments about the first half chart. Remember that there are two criteria that need to be met before a trader’s trick can set up. First, you need a trend line break AND you need to be trading above or below the 56 EMA. In the first half of yesterday, the price traded above the 56 EMA but there was not trend line break. Until you have BOTH criteria, there is no valid set-up. The second thing I would like for you to look at is a new indicator I am introducing today. Before I get to the indicator, here is a little background. During my quest to fine tune my trading strategies, I spent several months following Woddies’ CCI Club (www.woodiescciclub.com). It was started by a man named Ken Wood. My wife and I went to a couple of his seminars and met “Woodie.” He is truly an amazing man. The site and chat room is free and there are some excellent articles about trading psychology on his site. After studying his CCI methodology for a while, I found it to be a little too difficult to implement. So I left the CCI Club for better methods. In doing my work with CCI, I did discover a really neat tool to look at. Its called Woodies Pivot Pig. If you have Trade Station Charts, right click on the chart and go down to “insert Analysis Techniques.” Under the “indicator” tab, go to the very bottom and click on “Woodies Pivot Pig.” Several lines will appear on your chart. They are the “pivot”, S 1 and S 2 and R 1 and R 2 where the S stands for Support and the R stands for Resistance. These are floor traders pivots and support and resistance areas. Notice on the first half chart, there are a couple of areas I have circled. The pink line at the bottom is S 2. See how the price bounced off that line? Then at the end of the chart is an area where price bounced off S 1. Kinda cool.  I don’t keep these lines on my chart all of the time because they influence my taking a trade but I put them on the chart several times a day to  see where those areas are. Just another little tool that I like to use from time to time. I am sure other charting services have those same pivots.

Ok, now to trade 1, which happened after a break of the first hour low. It was followed by a trader’s trick below the 56 EMA. The trade was up 1.60 points. The stop was moved to break even and the trade was stopped out break even. Here is the chart.

Trade 1

Click on chart to enlarge.

The second trade was a bobber set-up after a double top below the 56 EMA.  There was only 1 big red bar before the set-up but the double top made the trade viable. The third trade was a trader’s trick set up after a break of the first hour low. Notice in the following chart how the price came back to the first hour low before continuing down. This was a really nice set up.

Trade 2 and 3

Click on chart to enlarge.

The rest of the day traded in large swings with no real trend line breaks. There was one bobber set up at the end of the day but as I don’t trade after 14:30 pm CST, it was not valid based on my trading rules.

So for the day, there were 3 trades. There were 2 winning trades and 1 break even trade for a net profit if $400 on 1 contract (ignoring slippage and commission).

I hope some of the insights and strategies shown today will help you to catch a whopper!

Best regards,

Ron

This is not a solicitation to buy or sell. 
There is a risk in any investment