RTY/M2K Short Trade Analysis (05/07/2024) - Position Closed

 

Welcome, Readers,

 

Today is a trade summary of my short currently underway in the RTY (well in the micro contracts at least). I actually tried two shorts, the first I got into early on a speculative position and was stopped out in quick fashion. Today, I’ll be summarizing my second short position that I opened on the Russell 2000 futures today. You can see a short summary of the trade on the chart below.

 

You’ll need to reread my previous analysis to understand why I was looking for price to reach these levels before considering my entry. To start with, price came up into the second confluence zone that I had drawn in my previous update. I mentioned that at this price level, the swing up from the prior lows would have good geometric proportions and satisfy a full five waves up to complete the micro ‘c’ wave of our wave (ii) correction. I’ve included a count of the internal wave structure in the image below to show you how I arrived at this conclusion.

 

However, as I wrote in my last update, just because price has entered a target zone, it does not mean I am immediately going to trade it. I need the chart to convince me through price action and technical analysis. So, let’s look at the 1-hour chart. My trading charts are split into left and right zones. The left-hand side is price action, the right-hand side are my technical indicators. For this analysis, I used the standard 14-period RSI (top oscillator on the right), the composite indicator developed by Constance Brown (middle oscillator on the right), and a simple 7-period detrended oscillator (bottom oscillator on the right). You can find more information about the composite index and its formula on Connie’s business website (aerodynamic investments). There is a default version that someone has coded on tradingview. I coded my own to make sure that it looks the way I prefer. On the RSI, the moving averages are a 13 period SMA and a 45 period EMA. On the composite index, the moving averages are a 13 period SMA and a 33 period SMA. These values are important for defining trade signals.

 

Okay, so the 1-hour chart shows us that the RSI is currently oversold with the value peaking at ~77.5. This tells me we’re due for a correction. Unfortunately, without a stronger signal this may only turn into a scalp trade, but we’ll see how things develop. I’m not going to buy however, simply because the RSI says we’re oversold. For that I’m going to turn to the composite index. It’s currently showing us a signal that is bouncing off of the top magenta line drawn on the oscillator. The horizontal lines drawn on my oscillators are all areas of support/resistance where corrections or trend changes have developed in the past. These levels continue to act as support and resistance in the future. I set these lines up a week ago and have been following price action off of them during this entire corrective rally. One note though that is important to remember, you need to set the levels for oscillator support and resistance for each timeframe you use. I use 1-hour, 15-minute, and 5-minute charts for my trading signals, so I will set up different horizontal lines on each time horizon. We can also see that the 7-period detrended oscillator is coming up to meet its resistance line as well, but exceeds it slightly, and instead stops at the same magnitude as a prior "M" shaped pattern where corrections typically form. I'm not as familiar with using the 7-period detrended oscillator so my levels may be off. I'll make a note to reassess that later. I’m interested in selling this price level, but I want to know my entry timing. For that I’m going to look at the 15-minute chart

 

The 15-minute chart above shows that both price and the RSI are currently diverging with both the composite index and the detrended oscillator. This is a signal to me that we’re nearing the end of this move and I should be ready to find an entry point soon. Note that the composite index shows a green line that has acted as support. When the composite index reaches this level, I’m going to assess if this trade is a scalp or a swing trade. If I believe we’re only going to see a minor corrective bounce, then I’ll leave my position on. If we move up sharply in price and the composite index barely budges, then this rally has more gas in the tank and this is a minor correction in my opinion. Now I’m going to look at the 5-minute chart to take my entry.

 

Here on the 5-minute chart I do not have lines drawn on my oscillators yet. However, we see that the RSI is relatively flat/weakly diverging with price while there are strong divergences with the composite index and the detrended oscillator. I look and see that price has already made a small decline and I enter a sell order at 2086.3. I use the calculator I released in an earlier update on managing risk to determine the spread between my entry and exit. Since this is an aggressive entry, I’m setting my stop beyond the top confluence zone shown in the first image and just beyond the even round number of 2100 at 2101. My calculator says that with my current liquidation level I can afford to short three M2K contracts for a maximum risk of 3% or less. My order is filled and we’ll see where this goes.  See you all later with an update.

 

Update #1 (~4:00 p.m. May 7th, 2024): Stops have been moved from 2101 to breakeven including fees and commissions at 2085.5. Since this was a speculative entry without strong confirmation from oscillators on the 1-hr timescale, I am willing to let the trade ride, but I want to make sure that if I am stopped out, it's not for a loss.

Update #2 (7:47 a.m. May 8th, 2024): Moved my stop from breakeven to 2076. Just over the top on the large spike up that happened last Friday morning. Current P/L at stop: 103 ticks ($51.5/contract). Managing risk is extremely important. I believe the strong bar down at RTH close yesterday is wave (iii) of a larger wave 1 move down in price. Price should not come back above 2074 if this is correct. We will see.

Update #3 (8:36 a.m., May 8th, 2024): This move down is coming along faster than I had originally anticipated. I am worried this could be a sharp zig/zag correction as part of a larger diagonal structure an alternative that I am now beginning to entertain as an option for one more push higher. I may look to take profits soon or trim my position if the indicators on my chart begin bouncing up. We should be due for some upward movement soon.

Update #4 (9:03 a.m., May 8th, 2024): I closed 2 of my 3 short positions leaving on a single runner with a price target of 2045. This is the 50% subdivision of the box made in my IWM/RTY analysis post that went up on May 7th. I believe we should see a correction soon and have decided to trim my position as we had struck my initial price target going into the decline of 2054-2055. (current low is 2054.8 at the time of writing). The 15 minute RSI is very oversold and the oscillators I use are starting to turn up. I DO NOT THINK THIS DECLINE IS OVER. However, I wanted to lock in profits and will look to short again after a bounce and failure of the oscillators under overhead resistance. The stop for the runner is unchanged at 2076. If I am incorrect and we do continue lower, the last open contract and my swing trade option positions on the IWM will provide good profits. I do not want to try and play corrective bounces with long futures contracts (counter-trend trading EW patterns is a recipe for disaster that I made plenty of times in my paper trading). I've inserted a small summary below to denote the trade statistics. Perhaps I'll keep a running tally to see how many points we bank over the next year following this trading strategy.

Update #5 (9:45 a.m., May 8th, 2024): I closed the runner as there was seller exhaustion following RTH open and could not break support down to my next subdivision target of 2044. If buyers can push price into the 13 period SMA on the 1-hour RSI oscillator and it is rejected, I will look to re-short more contracts with a tight stop, but those levels will need to be calculated first.

Update #6 (1:25 p.m., May 8th , 2024): There was a viable short setup that developed on the swing up into 2065. I was not near my computer at the time to watch the tape and take the trade. Waiting now to see if that was the entirety of the correction (it did swing directly into a Fibonacci confluence zone and get rejected. It was also the level of the 38.2% retrace of the move down off the high yesterday, so it could be the entire correction for wave (iv) of a larger wave (i) down.). If the entire correction is not finished, price will likely extend back towards 2065 or 2070 where I would look to re-enter a short position if the setup  presents itself.

---Trade Summary---

Short 3  M2KM contracts @ 2086.30

Close 2 M2KM contracts @ 2057.3 (banking 580 total ticks or $290)

Close 1 M2KM contract @ 2059.3 (banking 270 total ticks or $135)

Total: +850 ticks ($425)

Best,

DW