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.