The CME Group is offering our visitors four free daily analysis videos from some of the top names in the investing and trading world.
If you already have your username and password you can click on this link to sign-in and watch this latest video. If you have not had a chance to sign-up, visit INO TV FREE to access your password. Access is unlimited, so visit everyday to see new analysis videos.
Here is a transcript of a recent video on INO TV. This Technical Tips is part of Daniel Grama's Market Studies sponsored by the CME Group. Here he teaches the secrets of "Selling The Rally."
Market Studies - Technical Tip: "Selling Rallies" by Dan Gramza
---
“Hello everyone, this is Dan Gramza and welcome to Gramza Market Studies Technical Tip.
Well today we’re going to be talking about selling rallies. Now what does it mean when people say, “sell the rally” when you want to get into a trade? Or they sell a pull back? Or you hear things like, “The Trend Is
Your Friend?”
Well we’re going to explore this here in just a minute. I want to show you the technique a
nd I want to show you some examples of how these markets behave in those settings.
Now, before we do that I want to mention a few things...
Trading Futures and Options involves substantial risk and you must be prepared to deal with that. You should
carefully consider whether trading is suitable to you based on your circumstances, knowledge and financial resources. You must be aware of the risk and be willing to accept those risks. Don’t trade with money you can’t afford to lose. This website and this presentation is neither a solicitation nor an offer to buy or sell futures or options. No representation is being made that any account will or is likely to achieve profits or losses similar to those discussed in this website or in this course/presentation. The past performance of any trading methodology is not necessarily indicative of the future results and this material is copy-written.
Now let’s get started...
I want to show you an example, but before I can talk to you too much about this example I need to define a few things for you. First candles... the approach that I use with Japanese candle charts, and that is what you’re looking at here, is not the standard approach. So from my perspective, I don’t focus on patterns, I focus on behavior. If we see a green candle that represents buying, that means that the closing price is higher than the open. If you see a red box that represents selling it means that the closing price is below that opening price. If you see a white line on top that’s called a shadow, I think that represents selling. If you see a white line on the bottom that represents buying. Now with that in mind, the sizes of the bodies and the shadows tell us about the degree of buying or selling.
Now let’s talk about this set-up here...
What we’re talking about are soybeans and we’re looking at a five-minute chart. What we see here, the set up, is this market is trading lower and now we see evidence that buyers are coming into the market. This small green body which implies lost momentum and this big shadow on the bottom is rejecting these lower prices. Alright, if was a buyer here what I’m looking for is these buyers to carry through, right? Or what happens if this buying represents sellers who are now buying this market back to take advantage of that move? If they sold at $935 and the markets trading at $925 that would be $500 a contract. Each penny is $50, that would be 10 pennies times 50, or $500. So they starting buying to take some profit. A sign that they may be finishing, that it could be profit taking is this little guy right next to it, that red candle. That would say to us that, “hey you know that buying that was coming in. I think it’s over.” That’s what I would look for. Plus this one candle right here kind of stays dominant over all the action that we see afterwards, and I call that a benchmark candle. So here’s this down trend and here is the rally. When prices are going down that’s a breaking market. When prices are moving up, that is a rally. So the idea of selling the rally... why would we want to do that? Because it implies that this buying is over. That if we trade with the trend, in this case the near-term trend, is down. It’s a way for us to enter a trade after the trend has already started. You know a lot of times people feel the train has left the station without them... well here is a way to participate, to get back on that train if we see the right kind of set up.
So what should you look for if we sell this?
We should get paid immediately. This market should start moving down because we’re making the assumption that sellers are present. Well let’s see what happened in this case. In this case the market did cooperate. It did more further down. And in fact, look what happens afterwards. We see a bit of buying and selling and it’s kind of struggling going back and forth. We’re near $920. What do we know about $920? They’re selling $920, they’re not buying $920, there’s nothing but shadows up here. It’s staying below the midpoint of a benchmark candle; that’s one of the reference I look at too. And now if we can start taking these lows out, that may be another push to the downside, and again if it does, we should get paid right away. If this market starts making new highs, we’re out of here. Our assumption is not true. Like here, if we were selling this here and it started making new highs, forget about it, it’s not working. These sellers aren’t coming into this markets. The assumption was not correct, no problem, we stand aside. Same thing would be true here and in this case it happens to continue lower.
Let’s look at another example...
Here’s the E-mini S&P 500. Now this is on a thirty-minute chart as you can see down here. Well this market again is moving down, we have this down-trending type market. Buyers are coming back in, so is this profit taking? Well if it was buyers still coming in, then this would still be a green candle. And in fact they found sellers. So the buying action that we’re seeing coming in is failing. And if we were a selling at new lows on that candle or new lows below these shadows, we want to see that market accelerate back again for another push to the down side. Here it did, it did continue down, right? The other thing we have to pay attention to is always what happens down here. You know how this was bouncy, we saw that buying coming in. Well look at this one, now it’s really bouncing. We need to pay some attention to that as well. But here is the rally that we’re talking about from a sell point of view.
Now this is soybeans again....
Five-minute chart, benchmark candle, we see a little bit of buying coming in, smaller bodies yet. If we bought this should we get out? I don’t think so, but we should be cautious. We’re going against the dominate behavior here, which is to the downside. If we were a seller here we’d get out on new highs if this market rotates down. We’re letting the trade pick us up, that’s the way I approach it. The thing that’s troublesome though is this small body here. If we start making new highs it implies another push back up. It did accelerate, it did gain momentum. Look at this benchmark candle, how we stayed below that mid-point, how we see shadows as it tries to get near it. And then this red candle here I think is saying, “you know that buying that you saw coming in? It’s over.” Right, that’s what this candle says, “you know that buying that you saw coming in? It’s over.” I think it’s kind of the same message here. Well here’s what it did do... it gave us another push to the downside. Look at the rhythm that we’re seeing here, big push, it stops to take a breath, another big push, it stops and takes a breath, another big push, is it taking a breath... smaller bodies? Do I do anything here? No, I don’t think so, but if it rotates down I think I’d consider that and in this case it happened to do that.
Now, how about the Euro....
Let’s look at a currency, five-minute chart and the Euro. Here we see this market, the most recent behavior it’s a breaking market, a down trending market. Here’s the rally. Now look at this one candle. Almost all of this action is staying inside the range of that one candle. That’s the benchmark candle, it is dominant. We’re looking for sellers to push us back down. Check these last two candles out. We’re making new highs on selling. They try to rally, what do they find? Sellers. So if we sell this rally, if we sell new lows here, then we should get paid for that trade. And it this case it happened to do that.
The same thing, here’s your benchmark candle we stay inside that range of the benchmark candle. We make new highs, we kiss that high, what do we find? Sellers. And again I think it’s saying to us, “you that buying you saw coming in, forget about it. The sellers are here again.” So we’re looking for another push here to the downside.
So let’s do another one...
Let’s do crude oil on a five-minute chart. We’ve kind of been here before, haven’t we? Big dominate move, benchmark candle, staying about the mid-point, loss momentum, sellers coming in at higher prices, if we sell new lows this thing should be falling out of bed, and it didn’t. It came down to this low and we saw buyers coming back in. Next period will make or break this trade. If this rotated back up, made new highs, then we’d be out of that trade. In this case it happened to continue down. So the way it came in was the way it goes out. Sellers remain dominate.
Here’s another example...
Silver on a daily chart. So, the way it comes in is the way we want to see it go out? Should we stay long if for some reason we bought this? Well yeah, but we are fading this action right here. Well if we’re thinking, “maybe this trend is going to continue back up,” sure, that’s fine, but if it starts making new low, let’s stand aside and/or sell it because this could be a fairly dramatic move. In this case it happened to do that, it went out the way it came in.
Now look at this move. What do you think about that? Who’s stronger here, buyer or sellers? What the most recent behavior, selling. So this buying action is drying up, maybe these sellers are still dominant in this market. They’ve pushed down, they’ve now rallied back up. What we did in one period took four periods to cover the range of that one. And we’re seeing some selling coming in. If we were a seller here, or a seller at new lows here, it’s a way for us to participate in what appears to be a down move in Silver. This is a daily chart we’re looking at and we see some of the same kind of behavior that we looked at in the other charts.
Selling Rallies...
So the principals, the concepts that you can see in selling rallies it remain the same. Identifying that rhythm of the market that’s also what we’re doing. We’re plugging into how a market is behaving, to capture some clues of how you and I can participate when a market is in a down-trending mode. How can we get into that trade and/or capture some opportunity?
Well this concludes our Technical Tip. I hope you found a few ideas helpful. I do hope our paths cross again and in the mean time take care.”
Daniel Gramza
President, Gramza Capital Management
The CME Group
---
Go to INO TV FREE and access your password to watch Dan Gramza and other expert analysts courtesy of the CME Group.
