Today we are going to look at a high probability day trade in the E-mini S&P that sets up after a high probability swing trade set up. Chart 1 highlights the latest trade sequence that we traded where we bought on bar 1, 2, 3, 4 and 5 and exited on the close of bar 6. We are going to focus on bar 5 which is shown on chart 2.  At this point we have a market that has been going essentially sideways (on a closing basis) for 4 days in a row after the initial pullback.

So we have the elements that make a good trade set up. We have a pullback and we have prices stay in that area for several days triggering several Tradingmarkets Market Timing buy signals. It is like the rubber band analogy where we have stretched the rubber band (pullback in the market) and hold it in place for a while (several day pause in the market), only to watch the rubber band snap back with greater velocity and strength when it is let go.

So on the close of bar 5, we have a very strong bullish bias going into the next day for day trading. In other words, on the close of bar 5, we are going to look to play the market from the long side aggressively on the next trading day. In addition to the pullback, pause and several buy signals being triggered, we look at the four day pause (bars 2, 3, 4 and 5) and we notice that each day the market traded in a very volatile large range, and each day’s closing price was above the half point of the entire day’s range. This is a first clue that the market was not giving in to the bears selling force. In other words, if the market is so weak here, why are the bears losing control to the bulls by the end of the trading session?

Chart 3 shows the E-mini S&P with the previous days close highlighted, as bar 1 and Bar 2 show the first 15-minute bar of the next trading day. Now we are looking to play the market from the buy side, but we get the worst possible scenario. The market in this case gaps up on the opening which lowers our odds of a successful trade playing from the long side. I would have preferred to see a gap down or an even opening. The one thing working for us is the fact that the market opens and trades in a narrow range for the first fifteen minutes. We then mark one tick above the high of the first fifteen minute bar (bar 2) and place a resting buy order there if the market is strong enough to take out this high. This is highlighted as the blue line above bar 2.

The market trades sideways and then explodes upwards on bar 3 (shown on chart 4) where we are instantly filled on our long position right as the market trades above the first fifteen minute high because we had our resting buy order parked there. We immediately place a stop order right under the low of the first fifteen minute bar. The thing that makes this a “must trade” even though the market has gapped up is the fact that the stop order is not far away from our long entry. We are risking little for big upside potential. (Remember, we came in very bullish and expect quite a move from our swing trade buy signals).

Now that we are in the trade, what is our target? If we step back and go to a 60 minute chart, (Chart 5) we see an enormous amount of resistance that kicked off a big sell off. I have this resistance “zone” marked on my charts in red. This is my target area and I divide up my long position and place several sell orders starting with the bottom of this “sell zone” which is highlighted in red on chart 6 also. Chart 7 shows the market moving sideways for a good portion of the day and prices moving up into the sell zone where we have our resting sell orders.

Thus we end up buying the E-mini S&P on this trade at 1441.25, and exit in several orders inside the “sell zone” which equate to an average price of 1450.00. So on the day we make 8.75 E-mini S&P points day trading in addition to our swing trading positions. This is an excellent example of how I use the TradingMarkets Market Timing buy signals that trigger to help me with my day trading.

Paul Sabo has been a professional trader for over 18 years. During this time he has worked as a market maker in both New York City and San Francisco for some of Wall Street's most prestigious investment banks, commercial banks and brokerage houses. Paul later became the head trader for a top-ranked investment advisor and hedge fund based in San Francisco. Paul recently left his position at the hedge fund to trade his own money as a full time business as well as working with Connors Research Group on various proprietary projects.

Learn more about the 200-day moving average in the "TradingMarkets S&P Market Timing Course". To listen to a free Market Timing presentation led by Paul Sabo and Larry Connors, click here.