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Really? A Short-Term R2K Rally?

07/08/10 08:33:54 AM
by Donald W. Pendergast, Jr.

The bear market is far from complete, but for intraday traders, there are always plenty of bullish setups in various small-scale time frames. Here's a look at a potentially bullish setup in the emini Russell 2000 futures contract.

Security:   TFU10, IWM, .RUT
Position:   Buy

Daytrading futures contracts isn't for everybody, but for those up to the rigors involved, the transitions from bull phases to bear phases in the market occur with regularity, allowing for skilled traders to play each side of the market several times per week. Right now, the emini Russell 2000 futures contract is near a key support level, one that has a high probability of reversing into a multiday bullish phase in this particular market. Take a look at Figure 1.

FIGURE 1: TFU10. Easy as A-B-C? If only it were that simple. However, the appearance of a potential double-bottom pattern near key Fibonacci support even as money flow is telegraphing an impending reversal is a generally bullish proposition.
Graphic provided by: TradeStation.
Graphic provided by: Barry Taylor's Better Sine Wave support/resistance.
This is the 19425 tick chart for the September 2010 emini Russell 2000 futures contract. There is nothing magical about that particular number of ticks (unless they're all on your dog -- in which case, call a veterinarian); I simply look at the market in terms of the 777, 3885, and then the 19425 tick time frames. Multiply 777 by 5 and you get 3885 and then multiply 3885 by 5 and you come up with 19425. It helps provide a multi-time frame viewpoint that can be a big assist when trading from a discretionary angle. A major advantage of tick charts is that they greatly compress low-volume periods on the chart compared to time-based charts, and they can frequently provide better patterns and breakout trigger points. If you've never used tick charts in your own intraday trading plan, you owe it to yourself to spend some time with them soon, as it might help give you a fresh look into the dynamic price action of the markets you like to trade.

Now onto the technicals:

1) Price has tested the Fibonacci 127% extension ratio of swing AB, hammering out a very nice-looking double-bottom pattern in the process (see point C on chart).

2) The Chaikin money flow indicator (CMF) (21) at the bottom of the chart suggests that money is flowing into this security, enough so that a skilled technician might consider it significant, especially with a potential double-bottom pattern forming at a key Fibonacci extension ratio.

3) Prices have also strayed quite some distance from the 200-period exponential moving average (EMA) (yellow line on Figure 1), which also takes on more meaning, given what we just covered in points 1 and 2. The other moving averages are set at 50 (blue line), 21 (green line), and 9 (red line), and they all help give a better idea of the long- and short-term trend characteristics on the chart.

For intraday traders looking to play this move, here's one idea:

If you see that the Fibonacci 127% extension level at 582.78 holds on a retest, drop down to, say, a 1,000-tick chart and see if price is above the 50-period EMA on that time frame and then look for a suitable entry point, perhaps on a retest of the 50-period EMA. Calculate the risk-to-reward ratio between the potential entry point and the support near 582.50 and then between the entry point and the 200-period EMA (currently at 596.40) on the same 1,000-tick time frame. If it's better than 1.20 to 1, you may want to take a shot on this reversal, as there is an excellent chance that a relief rally could take the R2K up toward the 605.00 to 611.00 area in relatively short order. You could conceivably take half the position off near the 200-period EMA and trail the rest, should it decide that the R2K wants to head up to that zone.

Intraday margins in the R2K are pretty low; at TradeStation you need about $5,000 per contract, but that can be lowered substantially if certain conditions are met. These same dynamics can also be applied to those trading IWM, the exchange traded fund that tracks the Russell 2000, and if you haven't had much success in trading futures up to now, you should probably only consider this trade if you use small-share lots in IWM. You won't make as much money as the futures trader will (if the trade plays out as anticipated), but then again, you won't lose nearly as much should the trade stop out for a loss. At least you know what to look for, anticipating a potentially bullish reversal setup in a given market.

Donald W. Pendergast, Jr.

Donald W. Pendergast is a financial markets consultant who offers specialized services to stock brokers and high net worth individuals who seek a better bottom line for their portfolios.

Title: Writer, market consultant
Company: Linear Trading Systems LLC
Jacksonville, FL 32217
Phone # for sales: 904-239-9564
E-mail address:

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