The unrelenting wind howls across an open frontier as you survey your family’s last hope for food and survival through the oncoming winter.
As the mass of buffalo in the prairie below unwittingly awaits your move, you hear a sound.
The herd has been spooked and is immediately running as one at top speed. That’s about 2,500 heads of bison, 10,000 thundering hooves and over 5 million plus pounds of force heading over a cliff.
Welcome to the buffalo jump.
Within every established long-term trend, tempting counter runs are put in motion. Identifying the indicators of a jump in the wrong direction will help you enter the chaos for profit — while the unaware herd heads over the cliff.
Market move or tempting trap by institutional investors?
One of history’s most effective herd-hunting tactics, the buffalo jump concept is as stunning in its simplicity as it is devastating in its outcome.
In the buffalo jump during the times of the frontier… while the herd peacefully grazes, tightly packed in a seemingly safe haven, hunters are assuming positions both from outside and within using camouflage. At the appointed time, a battle cry is made. Those embedded within spook the herd while their counterparts on the perimeter drive the mass to the desired destination — an awaiting cliff.
This same thing happens in the markets.
Market moves can be put into motion by institutional investors more interested in ‘spooking’ retail traders from supporting the overall trend. Almost instantly the uninformed investor takes notice and begins to race with the growing herd in what seems like a seismic shift.
Discerning the difference between a calculated buffalo jump and a legitimate market move starts with spotting the start of the run — usually in the form of an irresistible rip or dip.
Say hello to your prairie, the ES 30-minute chart above. As the dip bottoms out, a corresponding and very attractive rip ensues. With the market on the run, how do you profit without getting crushed?
Spotting the trend and assessing the stampede
Watching a rip gain momentum with each frantic second makes it difficult to pick out the warning signs and avoid diving in. Especially as volume increases and other indicators (like the Relative Strength Index) start to peg in one direction or another.
Effectively exploiting these moments requires bucking short-term trends in favor of the larger picture.
How can you spot this at-a-glance?
1) Watch to see if previous highs and lows are not just challenged, but in fact overtaken.
2) Keep an eye out for compressed candles and long wicks.
These are indications that the larger landscape is imposing its will and showing resistance in the face of the racing herd.
They’ll also be followed by signs that the movement is losing steam, revealing your optimal entry point.
In this case the rip has failed to take out the previous high, a sign that the established downward trend is holding and will likely prevail. Also a signal that this short-term momentum is headed for the longer-term cliff.
Now that you’ve established that this may be a buffalo jump, how should you respond?
Selling the rip when the buffalo are about to jump
As the cliff comes into view, the run will likely show signs of hesitation providing an opportunity to enter.
Specifically, a peak that tires at the 50% mark of the prior swing is the signal you need that the prevailing trend is about to take over.
As our ‘jump’ develops, we see this opportunity surface with the next dip and corresponding rip. From the vantage point of the established trend — the point to sell the rip presents itself right at the halfway mark of the preceding dip.
Doing this, you’ve positioned yourself on the right side of the larger trend, established by two dips, unbroken highs and a rip that’s showing signs of fading with one last gasp in the form of an expansion bar heading for the 50% mark.
Watching the tails to escape the fall
They say you can judge the mood of a bison by watching its tail.
Should you find yourself on the wrong side of the rip or dip that’s heading the wrong way, watching tails may help you avert disaster. In the case of this trade, the long tail at the top of our second 50% rip betrays its exhaustion, a red flag that a swing could be imminent.
Just as the bullish expansion bar was our key for getting in and selling, an aggressive expansion bar, paired with a tail at the top (or bottom) is a warning to get the hell out if you’re on the other side.
Respect the dangers of the market and prosper in the prairie
If a herd of buffalo had a map and a conscious choice, they probably wouldn’t run off a cliff as fast as they could, plunging to their death. As a futures trader you have both in the form of charts and the gift of history.
Like any stampede, the force of institutional investors can be harnessed to your advantage. Identify the larger trend and prepare to trade with it. Keep an eye out for a rip or dip that’s moving counter to the general direction — but not breaking previous highs or lows — and showing signs of exhaustion.
Take aim at the 50% Fibonacci, channel your inner frontiersman and claim your profit.
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