The E-Mini S&P futures have been trading higher since the start of the new year above 2010's close at 1253, however, the market action has mainly flagged sideways for the first week and half. Although the Bulls have staved off several selling attempts this year, they really have not been able to induce the 'Santa Claus' rally which has led to some interesting chart developments on the daily time frame that may be flashing warning signs. Now we all know it is tough to "fight the tape" as they say, and typically not recommended, however, that does not mean we shouldn't look for potential contrarian set-ups. Especially when a low risk/reward scenario is seen.

Having said all that, let’s discuss the daily continuation chart of the E-Mini S&P futures. As I mentioned above, the market is in a flagging congestion band currently between 1255 and 1277, aka a “box range”. We have seen several “Doji” and small body candles with a “Spinning Top” candle on Jan 6, the day the 2011 high was posted at 1277. These types of candles reflect indecision between the Bulls and the Bears and warn of a potential change in trend. The RSI has been reading overbought on both the weekly and daily time frames while volume appears to be tapering off, additional signs that the market is “tired”. Now, the market may continue to flag sideways to alleviate overbought conditions before resuming its march higher, however, until then, I would entertain a potential short scenario.

Typically, candle patterns and other chart patterns require confirmation before acting upon. Unfortunately, waiting for confirmation may mean missing out on a good portion of a move. In this case, confirmation is below 1255, which means we would miss out on nearly 20 handles of profit. That being said, I like to take an anticipatory approach when the risk appears to be low and defined. In this case, the daily chart has established a Resistance barrier at the 1274 to 1277 range. This is our reference zone to consider shorting. We will be looking to initiate shorts on a scale in basis from 1274 to 1277 and place our Stops comfortably above the 2011 high of 1277. That actual point of placement for the Stop is dependent upon the individual’s appetite for risk. For me, my exit would either be above 1280 on an intra-day basis, or on a daily settlement above 1277 which would violate the candle patterns.

Now that we know our risk, it is time to look at our profit objectives. It is important to note that traders should always examine risk first, and then look at profit targets. In this scenario, we’ll assume our average fill price is 1275 and our max Stop/Loss would be about 6 handles if Stops are hit above 1280. Now, using the “Box Range” that the market has been in, we can project a move to the lower end of the range at 1255. So we are looking at nearly 20 handles before the pattern is even confirmed.

A steady break below 1255 and/or a settlement below there confirms the pattern which will likely trigger a corrective downturn in the days to follow. To obtain our second target, we would measure the size of the “Box Range” which is 22 handles (1255 to 1277) and subtract that from 1255. That places the target near around 1233, which would represent a 38% retracement of the December to present rally thereby confirming it as a solid exit point. In total, we risked just 6 handles to potentially make 40 handles or more.

One last thing regarding Stops should be mentioned. If and when the trade goes in our favor, a trailing Stop method can and should be employed to protect gains. This can be discretionary or technically based, again depending on each trader’s style.

In closing, we see how trading against the grain, or anticipatory, can amass significant profits with relatively low risk. However, this is just one strategy among many that can be placed in a trader’s arsenal.

Daily Chart:

Click on image to enlarge!

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