Its always interesting to watch how the market will respond to news events and government reports. This last Wednesday, S&P futures jumped up around 30 points in only a few short minutes in response to interest rate news. Traders love to catch these kinds of chaotic moves, but this requires a lot of patience and preparation. More often than not in the case of amateur traders, these moves come as a surprise in the form of a margin call. Looking back to the period right before Wednesday's move, let's see if the market give us any indications as to what was about to happen:
We will look at the long term chart (45 minutes is long term for day traders!) first, then move to the 5 minute. The move in question is circled in blue on the above chart. The one very large range bar includes the period when we had our chaotic jump.
Coming into the day, the Cycle Forecaster told us to expect a decline and then a rally. This is a broad brush technique at this level, but it gives us a game plan for the day, which is very important. MA_Fractal is a secondary indicator on this chart, and is used to gain insight into the health of the current trend. Declining values represent loss of trend strength while increasing values represent a gain in trend strength. During our period of interest, this indicator went flat at a high level and remained there without declining. This means that the market has moved into a consolidation mode, but without loss of trend strength. This quick analysis of the 45 minute chart has shown us two important things: 1) there will be a cycle low in the middle of the day, and 2) the trend is up.
Keeping this in mind, let's look at a 5 minute chart where the actual trading takes place:
Its much easier to see our jump in the 5 minute chart. Notice what was happening right before the big move. Price was making a very clear triangle pattern, shown in yellow. Midway through this triangle, MA_TrailingStops (magenta) moved into positive territory. Shortly thereafter, the Cycle Forecaster signaled that we had reached a cycle low and turned up. Notice how everything is starting to come together to create a bullish situation. MA_PredictDELUXE jumped on the bandwagon the bar before the move when the white forecast line crossed over the red 13 bar MA_Momentum.
A trader alert to these indicators would have known that the market had moved into a bullish phase right before the announcement took place. The announcement itself acted as the final indicator, and was the spark that set off the big move. This reaction to the announcement was not really an emotional, spur of the moment sort of thing. Unconsciously or not, there was obviously some preparation for an upward move right before the announcement, and the indicators picked up on it quite nicely.
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