When to be careful on a buy day

On Wednesday, I put on a buy day long position on the August gold futures (GC), and was stopped out of the trade. While this happens now and then, in retrospect, there was good reason to have been extra careful, or to have avoided the trade altogether. The chart below shows the set up day- a buy day, a sell day, followed by a sell short day. This should have set up a Taylor buy day, where the sell short day low is taken out, then a reversal takes place.

For a buy day entry, I look for three things to take place-

1. A break of the previous day's low.

2. Price reversal above that previous low.

3. A break of the 20 bar exponential moving average on a 15 minute chart.

See the chart below, and you will see the horizontal red line that shows the previous day's low, a consolidation of price, and the break above the low, which also broke the 20 bar ema. Following the breakout, price fell, and I was stopped out, as the lower trend line was taken out. 

Here is the daily chart that show how the day ended up- lots of chop back and forth, with no real directional movement-

So what is to be learned from this? I asked Scott Hoffman (my broker and a great Taylor Trading educator) what he thought, and why he noted the buy day of GC as "careful" in his Swing Trader Insight service (worth looking into if you want to trade the TTT method). His comment was that the setup day was an inside day, in addition to having been a shorting day. This indicates that a breakout may be coming, as it was not a true sell short day. A better trade would have been to go long if the previous day had been a proper sell short day.

Selling short on a buy day

This past Friday, sugar futures presented a perfect example of a shorting opportunity on a Taylor buy day. The second chart below is the daily bar chart for the October contract for SB. Monday set up a breakout- a doji bar just below the 20 day ema. The breakout did occur on Tuesday, with Wednesday carrying further momentum, often a sell short day after a breakout.

On Thursday, we see a classic Taylor sell short day bar. The previous high was taken out, then price reversed through that high, giving a signal to short. You will see in the chart directly below, that the horizontal red line indicates the previous high, with it being taken out at 10:00 am. Price tested the morning high, then broke down again at 11:30 am (see the yellow arrow). I use the 20 bar ema on a 15 minute chart to help validate the trend reversal, so the 11:30 bar is my entry signal.

This shorting day sets up the Taylor buy day. The bias coming into Friday would be to look for a violation of the Thursday low, then a reversal into an uptrend for the day. Instead, price opened above the Thursday low, dipped a little, then climbed before falling. How can this be traded? I have found that the 50% fib retracement is a good indication of whether or a not a trend will continue, or fail. Other classic fib levels can be used, but even going back to Charles Dow, and then taught well in Victor Sperandeo's book Trader Vic, the 50% level is pretty reliable, and can be used an trend entry level if you are not able to catch a buy day or sell short day entry earlier. For more on this, follow Scott Hoffman's blog (click on his name under "trading links"), or go to Richard Russell's site, Dow Theory Letters.

As you will note in the below chart (15 minute bars), the 50% retracement principle comes into play clearly. I have drawn fib level lines, from Thursday's high (double top), down to the low just after the open on Friday. The high on Friday tested, then failed at, the 50% fib level (see the horizontal blue line). Again, I use the 20 bar ema on the chart as a trend reversal validation tool, so the short signal for me came at 9:00 am, with the wide range bar at 10:45 indicating that the position should be closed out. A bar like this is often a sign of an exhaustion move.

So, while the day after a sell short day of often a buy day, if the previous day's low is not taken out, but price climbs, this may be indicative of continued selling pressure, and a "buy day, high made first" setup may present itself as an opportunity to short.