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In yesterday’s MrTopStep Opening Print we said to buy weakness. And you know what? No matter how you look at it, that was the best trade of the day.

Yesterday’s price action in the S&P 500 futures was another great example of what the Pit Bull and I have been saying for a long time. The only way to trade the S&P is to buy into the sell stops and sell into the buy stops. When the SPZ started selling off under 1401 it hit a line of sell stops that went down to 1397. Once it rallied, it started taking out the buy stops from 1410 up to 1414.50. In both cases the SPZ reversed direction after running the stops. See chart below:

The program and algorithmic traders will tell you that that’s not how their systems work, but after years of seeing thousands of written and hand-signaled orders, I know there were specific ways retail would enter orders. Some systems use stops to reverse from long to short; there are trailing stops, stop limits, OCOs. Somehow these system writers have identified those methods and written them into their trading programs.

HOW to beat the machines: Traders can beat the machines if they follow a few simple rules. The first one and the most important rule is to be patient. Trigger-happy traders do not make money. The second rule is to expand your levels. You have to wait for the ES to get stretched out before buying or selling. And the third rule is if you follow 1 and 2 you learn to hold on longer. Buying and selling futures for 2 or 3 ticks is way too risky. The problem with this is risk-reward. You will never be able to get out of a CL or an ES position if you’re buying and selling for 3 ticks. Risking 3 ticks to make 3 ticks does not work.

The moral of the story is trading futures has gotten harder and because of that we need to constantly retool. The SPZ has now sold off and run the sell stops on the downside and everyone is very bearish. Like we said yesterday, the risk is to the upside. Any positive news regarding the fiscal cliff will cause a big rally in the S&P futures and more than likely help set up the year end Santa Claus rally.

Danny Riley is a 34-year veteran of the trading floor. He has helped run one of the largest S&P desks on the floor of the CME Group since 1985.

Our view:
I said it yesterday and I will say it again: The risk is to the upside. President Obama and the Republicans are under enormous pressure to strike a deal. According to the congressional calendar, Congress breaks for the year in 5 days, they recess for 2012 on Dec. 17 and do not return until January. Unlike many, we think there will be a deal at some point. Our call is to play both sides of the ES today. Sell the early rally and then look to buy weakness. As always, keep an eye on the 10-handle rule and please use stops.

Today’s data:

  • It’s 7 a.m. and the SPZ is trading 1406.40, down 1.9 handles; crude is down 24 cents at 87.64; and the euro is at 1.3071, down 9 pips.
  • In Asia 7 out of 11 markets closed higher (Shanghai Comp. -0.13%, Hang Seng +0.49%).
  • In Europe 9 out of 10 markets are trading higher (CAC+0.09%, DAX +0.98%).
  • Today’s headline: “S&P Futures Signal a Flat Open”
  • Economic calendar: Today:  BoE announcement, Challenger job-cut report, ECB announcement, jobless claims, quarterly services survey, Apple/Samsung hearing; earnings from H&R Block, Lululemon, Smithfield Foods, Cooper Cos. FRIDAY: Employment situation, consumer sentiment, consumer credit
  • Globex volume: 2mil ESZ and 13k SPZ trade
  • Fair value: S&P -0.5, NASDAQ -0.25


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DISCLAIMER: The information and data in the following report(s) were obtained from sources considered reliable. Opinions, market data, and recommendations are subject to change at any time. Their accuracy or completeness is not guaranteed and the giving of the same is not to be deemed as an offer or solicitation on our part with respect to the sale or purchase of any commodities or securities. MrTopStep, its officers, directors and its contributors may, in the normal course of business, have position(s) which may or may not agree with the opinions expressed in this report.