Trading strategies that work: Morning momentum short squeeze in emini (es) futures contract

This trade combines an understanding how other traders trade  with a quantified study of daily price behavior.

We know from one of our  studies that the best time to trade breakouts in the emini contract is after a morning gap up “surprises” the market.  Well, it turns out this same setup works very well for even shorter term (morning session only) day trades.

Because we are looking to exit the trade by the completion of the morning trading session (For us that is the first two hours of the trading day)  We can remove the overbought filter that we found to be effective for day holds.

 In fact, overbought markets can create some of the best opportunities, as shorts get squeezed for the first several hours of the day.
Emini (ES) SP500 Contract: 5 minute day-session charts

 

Here is the setup:
  • Morning session:  We look for a gap-up opening from overbought conditions, or a +10 point gap up if the market is not overbought.
  • Within the first 20 minutes of the day, we want to see very limited price probes below the open.  The best conditions set up if the low of the first 20 minutes is at most a few ticks to a point or so below the opening price.
  • Within the first 20 minutes, we want to see several larger range five minute bars closing up.
  • After this point, we want to buy small dips (.75 – 2.5 points) below new highs, or buy breakouts to new highs
  • Exit criteria:  A 1.25 point break below a 30 minute low cancels the long bias.
  • 4-6 point profit target on long trades or 15-20 minute hold for scalps – If I catch what looks to be a good trade, I usually try to hold untill 10:30am CST.  I don’t mind giving back some profits because winning trades can be huge relative to the time in the market.
  • You don’t want to see any pullback last much more than 20 minutes.  Beyond this point suggests momentum is shifting and longs might end up being the ones “squeezed”
  • 10:30am:  Exit any long that has not been exited via other criteria.

See all of my emini trading articles by clicking here.

I discovered this trading strategy during a period when I was almost exclusively swing trading.   I noticed that when the market was set up for a short-sell opportunity on the swing-trade (multi-day) time horizon, there where often powerful, morning session rallies that really “squeezed” the position and made it quite uncomfortable to hold on too.   Click here to sign up for my email list.

I think this psychology is what is behind the morning session momentum trade:   Gap ups from overbought conditions tend to create a great deal of discomfort for short sellers.  Day traders also add fuel to the fire, as they are often habitual counter-trend traders who jump in only to get instantly hammered.   When the trend upwards accelerates after the gap open, both of these groups begin to panic.  They often put stops just above the day session highs, AND put limit orders in below the current market, looking to get out at “break even” or just a little bit better than the current market.  Both of these activities work to support the upward momentum while making it difficult for longs to enter.
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While this strategy is very effective, it is not foolproof:  Here are some common mistakes when applying this trading approach.
      • The most common mistake when trading this pattern is wait for too big of a pullback.  The problem with this approach is a large pullback suggests that the day is not a genuine short-squeeze opportunity, and that the setup itself is not going to work.  by waiting for a large pullback such traders are unfortunately cherry picking losing trades.
      • The second most common error is taking the trade after the market has been pulling back for 30+ minutes.  The problem, once again, is that such a pullback suggests the morning momentum is not what it should be for the trade to work.
      • Often, these “slow” traders are buying below a 30 minute low (combining both the above errors) and end up kicking themselves when their position gets creamed.
      • Taking the trade too late in the day (After 11AM EST).   This is really a morning setup.   Day long holds from overbought markets tend not to be a good bet.
      • You do not need to wait for 20 minutes to pass before looking to take this trade.  If the first 5 minutes is a large up, you can start looking to get into the trade within the next 15 minutes.  In fact, If I think there is a strong setup, I will often start buying before the first five minutes of trading is complete.

The same principle of reading price after a large gap applies on the short side.  If after a large gap up, the market is not able to trade more than a few ticks to a point or so above the open (within the first 10-20 minutes of the day), This is a very good indication that the gap is going to fill.  This should give the trader a short bias for the duration of morning session and can set up some very powerful short-sell setups.

This is one of the few trades where you can often set a pretty tight stop, both in terms of price and time. This is because the entire premise of the trade is that caught shorts will prevent the market from pulling back much at all.   If on the other hand price cannot get much above the open, it indicates that euphoric longs are about to get creamed and the trader should have a short bias for the duration of the morning session.

Readers who enjoyed this article often like:  Emini Day Trading – combining gap strategies with opening range analysis

Or, read all of my emini day trading articles here.

Leave A Reply (8 comments so far)

  • Alex

    The blog is cool

  • Anto

    Good!!

  • Mike

    I want to learn more about the morning momentum. Your last Tweet suggested a subscriber report would provide details. I presume this means we need to be subscribers, and if so, when will this be available so I can do so? Thank you.

  • Mike

    Is the inverse effect seen in a down gap in oversold conditions or is this strictly observed in an upgap in overbought conditions?

  • nastrading

    Hi Mike, Yes, I am setting up a subscriber feature of the NAS Trading site and am working on the first reports now. My hope is that the reports will contain information that is valuable to traders at a reasonable cost. Sign up for the email list to make sure you are informed when the subscriber feature goes live. Thanks for your interest.

  • nastrading

    There are actually quite a few combinations that can work. If this stuff really interests you, I think you will like the subscriber reports I am currently working on. I will have some specific examples or rule sets, however I think the principles and concepts will be the most valuable aspect of the material.

  • Mike

    Will do! Hopefully the service will be available soon as it fits perfectly into an active project of mine that I am eager to test. Thank you!

  • nastrading

    Just as an update: The service was not offered and is not offered. I ended up thinking better of publishing 100% explicit, useful and profitable trading strategies.