A couple of weeks ago, we wrote about psychological barriers in the markets and how a proverbial line-in-the-sand is currently serving as key support in the S&P 500. Understand that psychological levels are as timeless as the markets themselves. They’re also not limited to specific markets. Equities, precious metals, commodities and currencies all consistently bump against certain levels including round numbers, prior high/lows, moving averages, and Fibonacci ratio levels.
The question then is how should we position and profit based on these levels? We’ll discuss a few recent examples and how best to trade them.
The following graph shows a 15-minute chart of the Chicago Mercantile Exchange’s (CME) S&P 500 E-mini futures contract (ES) which is the largest and most actively-traded vehicle in the world (it’s what you see on the ticker when you flip on CNBC).
As you can see, the ES bounced off of the 3000 psychological support level at the end of June. As it zig-zagged downward towards that level from mid-June, a single contract long position at 3000 on June 28, with a stop loss order just below the June 14 low at around 2930 and a trailing profit target once it pushed above the 200-bar moving average (a risk/reward ratio of 70/117=0.6), would have yielded a $5712 profit.
This next graph shows a 5-minute chart of the front-month crude oil (CL) contract.
The psychological level that the CL contract bounces off of here is 40 with a nice wide-range trajectory upwards. There were a few solid opportunities to go long with prior lows as stops and a top-range channel as profit targets. Keep in mind, the CL frequently behaves differently than the ES. Given the enormous amount of volume traded, the ES tends to trade in tighter channels and makes use of moving averages for profit targets, whereas the CL tends to trade better when playing the channels.
Finally, this last graph provides several examples over the last couple of months trading a 60-minute gold (GC) chart.
Similar to crude oil, the GC contract faded downward until it hit a psychological level (in this case, 1700), then bounced upward towards the next rounded number level of 1800. Traders could have chosen to trade channels (similar to CL) or the 200-bar SMA (similar to ES); either would’ve worked well.
Unlike the two previous charts, attempting to play the barriers resulted in a few losses. But as you can see, that was perfectly fine; other profitable opportunities unfolded. This highlights a critically important takeaway: never EVER enter into a position without clearly identifying a stop loss (especially when participating in the highly-leveraged futures markets). Many traders’ accounts have imploded as they wished positions to reverse in their favor only to continue trending against them. It’s best to take the loss that was acceptable upon initial entry and wait for the next opportunity (and trust us, there are endless opportunities to profit). Think about it…markets can trend aggressively because of traders with unwavering stubbornness who persistently fight against that trend. Their innate refusal to be wrong keeps them from flipping to the right side until a severe pain point is reached and forces a loss which in turn even further feeds the prevailing trend. It’s better to be solvent and, even better, profitable than to be right. After all, the trend is, without a doubt, always your friend!
Both MCR’s Forte Strategy and the new Forte Futures, available for subscription through Collective2, utilize the above psychological barrier approaches as part of an array of tactics to outperform the benchmark S&P 500 index.
Forte Strategy Update
We executed 15 trades last week using the Nasdaq 3X leveraged ETF (TQQQ) and a new model based on UVXY which is a 1.5X Leveraged ETF that mimics the VIX futures contract. We incurred a small net loss of 0.3% compared to a gain of 1.8% by the S&P 500. Our YTD net results so far equal a 2.4% loss compared to a 0.9% YTD loss for the S&P 500. Our YTD max drawdown is 9.5% compared to 33.9% for the S&P 500.
Forte Futures, which was introduced in May, is up 3.4% since inception.
More details about our trading activity can be found by registering on the Collective2 website and searching for “Forte Strategy” and “Forte Futures”. A running list of these email blogs and general information about Maestro Capital Research can be found at maestrocapitalresearch.com.