The area of support or resistance that is hit FIRST in the
morning has special significance. In the first hour of trading,
the market's reaction to initial support or resistance is a good
"tell" for the strength of the next move.
For instance, if the market moves up in the first 20 minutes of
trading, touches the initial resistance zone, and then turns
down, this implies that a good tradable downtrend move is likely
to develop.
How strong that new trend becomes is market-dependent. As the
market falls, its reaction to each new support zone gives an
indication of how weak or strong the new downtrend is. If the
market falls to initial support and breaks down through it
without a stall or a bounce, it will probably continue down to
the next level of support. But, if the market loses downside
momentum near the initial support zone, the downtrend may well be
over.
When price comes into a resistance or support area, the NYSE TICK
is by far the best indicator of what price may do from this
point. What is the "TICK"? The TICK is simply the difference
between the number of stocks that last traded on an "up-tick"
versus the number of stocks that last traded on a "down-tick".
When the TICK reaches +1000, the market has reached a short term
overbought extreme and the TICK reaches -1000, the market has
reached a short term oversold extreme.
When the SP futures make a quick surge to a strong resistance
zone, and then loses momentum at or near the zone, while
concurrently the TICK registers an extreme high reading (usually
over +1000), this sets you up for a high-probability short entry,
with a hard stop just above the resistance zone.
These counter-trend trades "fade" (meaning to enter a trade
against the trend) the intraday emotional extremes, and may come
at the beginning of a new trend - giving you a chance to hit a
"home run." More often, however, they become scalp trades that
don't last long, sometimes less than a minute. Either way, they
are high probability trades if you time your entry well.
It takes a lot of practice to time your entries just right on
these trades, and you have to be ready to get out immediately
(before your hard stop is hit) if you sense that your edge has
disappeared. It is difficult to sense when the edge (probability
of success) of a trade is gone *before* the trade changes from a
small gain to a small loss. Practice will help *if* you know what
you're looking for.
Most traders believe you have to wait for your hard stops to be
hit before you can know that a trade's edge is gone. This may be
true for most traders, but it doesn't have to be true for you.
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