Wall Street Knows Your Playbook

One axiom that has stuck with me through the years is the one used when traders are on a losing streak and they refer to engaging the market as “picking daisies in a minefield”.  This saying refers to the notion that when the market looks very good: in an uptrend, great news being released, and every pundit telling you they’re bullish, this is usually when it blows up. Sound familiar?

This is not limited to going long; shorts also find huge reversals to the upside just when the market looks as though it’s ready to fall off the abyss. We see this time and again as the markets are full of traps that the unsuspecting novice trader usually fall prey to.

One of these traps is the idea that when prices trade above or below prominent price points, the particular Futures contract is perceived to be bullish or bearish. These price points can be a variety of conventional technical levels. Some are what are commonly referred to as support or resistance. Others can be a prior day’s high or low (pivots).  Also, the overnight peaks and troughs (known as the Globex) are seen in this fashion as well.

In the two charts below you can see what these traps look like.

As we can see in the charts above there have been two of these type of setups in the equities futures. One in the TF (E-mini Russell 2000) and another in the Nasdaq E-mini. These worked very nicely as they both dropped substantially. Most traders would wonder why you would want to short new highs. If you think that, then the trap is set.

The main reason is that many traders are “conditioned” by all the books on conventional technical analysis to buy new highs or lows.  As I mentioned earlier, this tends to make them bullish or bearish depending on where prices trade.  There are many instances where the new highs actually act as pull back areas in a trade. In other words, a higher high in the context of an uptrend quite frequently acts as the high point before a retracement, thus stopping out those that chase the trend.

The next and most important point is that often times right above or below these new highs and lows are supply and demand levels which act as repellents to those new buyers or sellers.  This is exactly what happened in the two examples shown above. If you look closely inside the smaller time frame candles you will discover those pockets of  sell orders just waiting to get filled.

In addition, traders on Wall Street know pretty much where novice traders will buy, sell and place their stops. Do you think that would be hard to guess? Probably not. They essentially know the playbook of any trader that has read a book on technical analysis.

Since many of you have been reading these articles for a while, I suspect you probably don’t buy new highs or sell new lows in your own trading.  For the rest of you, making sure you don’t fall prey to this particular trap means learning how to identify quality supply and demand levels, as well as learning that conventional thinking is a trap in itself.

Until next time, I hope everyone has a great week.

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