Commodity Futures Day Trading The S&P 500 and E-Mini - Observations - PART 4

By Thomas Cathey

Not all conventional commodity trading folklore is correct. Some is and some isn't. Much is anecdotal. Most of it is designed to make you feel comfortable in a trade. Feeling "comfortable" is the fastest way to the poorhouse in commodity trading. We are paid to provide liquidity and take on risk. Read on to see if you adhere to this basic and important market law.

More S&P 500 and E-Mini Futures Contract Observations: PART4

"The following e-mini futures action turned into a big chop, then a big rally the next day: After a clean out decline, wait for a series of bottoms with big volume buying activity. Wait for the sell-off to a bottom and sharp rally and then the volume dies. This is the safest place to buy. This was the forth bottom and the previous three bottoms had bearish volume patterns. The forth bottom changed - it had bullish volume patterns and then price rallied to the close."

It pays to step back and view the e-mini futures market in context. My notes keep repeating it's a mistake to buy the first panic spike. I'd gotten good at buying spikes and wondered why I always broke even or even lost doing it. Most of the time a huge e-mini futures climax is followed by several tries to test the bottom. It's easy to get chewed up in these bottom tests since they can last for several hours before a big turn.

The single spike low that holds and supports a big move was popular in the 90’s, but it seems to have been replaced by a series of double, triple and quadruple bottoms. Throughout the bottoming area, you will see a bearish volume pattern until near the end where it turns bullish within the formation. It’s often profitable to stay bearish and continue to sell rallies and cover at the bottom area. In fact, EXPECT big bottoms to be tested.

If you are early buying a bottom, don’t let these tests fake you out. If you are positioning long, expect them and even average in some more as long as the bottom area reasonably holds. The e-mini market may even spike the original low by one-half to a full point, but any more usually means a major break down and you want to be gone.

Remember that “major” e-mini day-trading lows occur only every 3-5 days or longer, so be selective when positioning for them. Personally, I have found big turning point positioning to be a waste of time and money from a day-trading point of view. It often leads to overnight holds and a bad next-day gap surprise. It’s better to let the longer term futures traders beat themselves up and get the occasional rewards. Playing these large, range-bound formations from the short side until they finally end is the best advice.

When the e-mini futures market starts trending, use this larger frame of reference (the recent bottom) to pick up a bias in a certain direction. Then simply buy the dips and exit at the climaxes over and over. After identifying a big turnaround, don’t try to outsmart the market by shorting or reversing your position against the trend.

This is a difficult idea to adhere to, because the e-mini market will always be having minor corrections and try to fool you into believing it’s turned back down. But after the minor correction is done, the market will move to new highs in line with the accumulation that took place in the last couple days.

Part Five of Five Parts - Next!

There is substantial risk of loss trading futures and options and may not be suitable for all types of investors. Only risk capital should be used.

Thomas Cathey - 27-year trading veteran heads the managed futures division of Thomas Capital Management, LLC. View his TimeLine Trading market predictions and get his complete 44+ lesson, "Thomas Commodity Trading Course" - they're all free. Main site:

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