Real Time Supply and Demand, the Key to Low Risk/High Probability Anticipatory Analysis
Last week, I explained a trade setup we took in the XLT Futures class to help you understand how demand (support) and supply (resistance) works and how we quantify it in real time in the XLT. This week, we used that same demand level as last week in the S&P futures to take a very different type of trade. When trading anything, there are two basic types of entries to focus on. Yes, that's it, just two. Let's review them here and then go over this week's S&P trading in the XLT.
Uptrend:
1) Buy pullbacks in price at support (demand)
2) Buy breakouts through resistance (supply)
Downtrend:
1) Sell (short) rallies in price at resistance (supply)
2) Sell (short) breakouts through support (demand)
Area "A" represents a support (demand) level we focused on two weeks ago. It was a level where the price action suggested there were more buyers than sellers as price rallied strong from that level. "B" is the area I pointed out in last week's letter as the price where some XLT Futures traders bought. This was the first pullback in price to demand area "A". See last week's letter for a more detailed explanation.
Thursday morning of this week, we were in the XLT and price was back to our demand level… Or was it?? Once traders bought at "B", I mentioned to them that we would no longer be buying pullbacks to Area "A" as demand was likely not strong any more. This is because:
With each successive move in price to a demand or supply level, that demand or supply is absorbed, therefore, weakening the demand or supply. Much like the chopping of a tree, with each strike of the ax, more and more mass is removed and the tree is more likely to fall.
Thursday morning at "C", our plan was to sell short on a breakout to the downside right below area "A" and "B". The fact that the demand at "A" and "B" was depleted was one factor but that's not enough. Before you take any trade, you must have an objective PROFIT MARGIN. The area shaded grey on the chart represents a pocket of nothing, no demand, no supply, no inventory… Therefore, if and when price moved into that area, we anticipated it would fall quickly from 1260 to the 1246 – 50 area and it did. Some traders in the XLT Futures class shorted that breakout and profited nicely, congrats. Someone else in the XLT bought at "C" who was brand new to demand and supply thinking, "Could that long at 'C' have worked out?" Sure it could but the objective odds were stacked against the buyer at "C". The only way to quantify this in real time is to be able to see the reality of what the always honest price action is telling you.
Don't seek certainty in trading because it does not exist; seek better odds with objective rule based information. Become a part of the group that sees the markets as they really are and get paid from the group who does not.
Dollar Update: Our long dollar, short British Pound, Short Euro trades have moved strong in our direction. The British Pound short position from the 1.9800 area has met the longer term target of 1.7500 – 1.7600. The long Dollar suggestion came when the Dollar index was at 72.00; it's now above 78.00 and likely has some more room. I have received many emails on these position trades asking for updates so I thought I would mention it here in the letter. Congrats to those who took these positions and keep in mind that the Pound reached the target this morning for profit taking. For more information on when and why this opportunity was suggested, please review my articles from early June.
Lastly… If you have a topic you would like me to write about, please feel free to send me an email with suggestions. These articles are for you and for your benefit so please ask questions if you have them.
Have a great day.
Sam Seiden – sseiden@tradingacademy.com
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Sam brings over 15 years experience of equities, forex, options, and futures trading which began when he was on the floor of the Chicago Mercantile Exchange. He has traded equities, futures, interest rate markets, forex, options, and commodities for his personal interests for years and has educated hundreds of traders and investors through seminars and daily advisory services both domestically and internationally. Sam has been involved in the markets since 1991 both on and off the floor of the Chicago Mercantile Exchange. He has served as the Director of Technical Research for two trading firms and regularly contributes articles to industry publications. Sam is known for his trading, technical research, and educational guidance.