Identify when others are wrong

Another data filled morning (US time) today.

The open was quiet but the gap play although small was a pretty good probability setup today. With a low overnight range, an open well inside yesterday’s action, and sellers in the pit it was worth a nibble.

After that I was looking for extensions to fade until the data was due. The YM tagged yesterday’s high which coincided with the overnight high, another nice low risk scalp short opportunity. V tight stop, small target, hit and run trade.

Now came the interesting stuff……

The data was released and we popped 30 or so points higher, this happened to coincide with 10700 dow cash…..interesting. Well I never fade data moves preferring to go with the flow and jumping on after a pullback. So that is what I was waiting for, until I saw this:

The first 5 candles after the data are all pretty normal stuff, a consolidation after a spike before the next leg up. But the 6th and 7th candles showed us something else.

The 6th candle after the data again is not unusual; often you’ll see a small push under tape support before the push back in the direction of the trend occurs. However the 7th candle really tipped the hand of the market. It pushed back above the short term support level, but failed. Not only did it fail but the candle immediately after it pushed deeper into the lower end of the data spike bar AND posted the lowest TICK reading of the day. Failed pattern/trapped traders alert!

Everyone was looking for the continued push higher, we’d broken out of the multiday range, popped above 10700 on the dow on good data, my guess is most traders were positioned for another push. But that few minutes of activity showed us there were no more willing buyers, reduced demand and anyone looking for that next pop was going to be disappointed. If you can identify this sort of situation in which those on the other side of your trade are uneasy and wrong you have potentially a fantastic setup.

I took the short, my stop was going to be above the high and my final target was the open @ 10609.

Well the mini panic set in as it dawned on people that we were heading down. In hindsight I should have pressed this to the maximum, but I’m still cautious about shorting this strong market, I don’t want to hang about. So I scaled out a batch at yesterday’s high and got my final target of the open. Bingo.

But there’s a twist, I actually reversed the trade here, expecting some sort of mini bounce to scalp, but again nobody stepped up. I really didn’t like it, watched the tape, came to my senses and closed for a 3tick loss. What was I thinking? The panic was still in full flow. Get short again this could take out lows and tag 10600 cash here!!!

I moved over the S&P, I didn’t want to chase this, if I could get a fill a tick above the best offer I’d give it another go with a few tick stop. So I stuck an order at 1119.50. Ding the market lifted a touch, filled me and then dropped. I was going to scale some into the stops below the gap and run a few with a trailing stop until 10600 on the dow (and close at whatever the ES was at the time) Well I got filled at 17.5 and 17.25, but then the market bounced. No more panic, sellers had calmed, the pit was getting quieter, volume was drying and the TICKS started to rise. My trailing stop got tagged at 18.5.

That was me done for the day.

Identifying who is on the other side of your trade and understanding what they are thinking can really help you identify great opportunities. In this case the expected didn’t materialise and when this became clear, longs ran for the exit. Tape reading at these key points can give you that heads up and enable you to get positioned accordingly before the rest do, maximising your profit and minimising your risk.