How to Trade E-Mini Futures Intraday

04/11/2011 12:25 pm EST


Corey Rosenbloom

Founder and President, Afraid to Trade

Using recent action in the e-mini futures markets, see how to identify and trade the classic “dead cat bounce” pattern on the intraday charts, a pattern that often occurs in other markets and time frames.

I’m overdue for an intraday trading lesson here on Let’s talk about trading E-mini futures (ES) intraday.

Listen in to a Trader Talk Podcast episode with a full-time E-mini futures trader here.

Last week, the market gave us a great example of how to set up, forecast, and trade a classic “dead cat bounce” set-up on the intraday charts from a surprise or shock move that created a large impulse move.

Let’s take a moment and learn this lesson step by step, keeping in mind that while I’m showing this concept on the one-minute intraday chart, this concept of “Impulse, retracement into resistance, and sell-off phase” is applicable to all markets and time frames.

Here’s what it looked like at the time of the entry trade alert:

Click to Enlarge

Let me do a quick review of the “dead cat bounce” situation and set-up.

First, we can’t predict big breakout or sudden impulse moves in the market, but when they happen, we can anticipate a possible outcome that takes the form of a flag or strangely named “dead cat bounce,” giving us a small window of predictability that sets up a unique trade.

In English, the initial down move in the stock market occurred because of news of another earthquake in Japan, sending traders/investors toward a “Sell first, ask questions later” mentality.

Whatever creates the big impulse is not as relevant as how you recognize the pattern on the chart and prepare to trade the second movement down after an initial reaction up.

Translation: Sudden, impulsive moves tend to create a rally up into resistance as traders get their bearings straight. If on this rally, internals, volume, or momentum weaken considerably (and form divergences like I talk about here), you can get ready to put on a “dead cat bounce” trade, which attempts to profit from the second down move after an initial reaction up.

It’s easier to see it in the chart than it is for me to describe it.

We’re looking at the @ES futures on the one-minute frame after the initial plunge down and we saw a retracement or reaction up into resistance via falling moving averages (20- and 50-period exponential moving average (EMAs) and a standard Fibonacci retracement grid).

An aggressive trader, thinking a new leg down was likely to come when this initial retracement ended, would look to put on a position into a resistance area, namely the 50 EMA (blue) with reversal candles just before 10:00 am CST or on the final push to the 61.8% Fibonacci retracement at 1,330 after 10:00 am.

Either way, the trader would place a stop above the 61.8% retracement and EMAs, either at 1,331, 1,332, or 1,333, depending on risk tolerance.

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OK, so that takes care of the aggressive entry (into resistance and ahead of an expected turn down in price), so the conservative “prove it to me” entry comes later on an actual/triggered price breakdown of the rising trend line at 1,329.

Either way, the minimum target is a retest of the prior low or even a target beyond that, which in this case would be the 1,324 level.

There’s your real time, step-inside analysis above of the potential down move yet to come via a dead cat bounce set-up intraday.

Here’s what actually happened:

Click to Enlarge

Above, I show the four potential entries into this set-up, depending on your aggression level.

There’s two aggressive entries (into resistance) and two conservative entries (after a trend line break).

I’m not here to tell you which is better; it’s up to you and your experience to determine that.

Anyway, the price did fall as anticipated and as forecast by the impulse move.

(In my new book, The Complete Trading Course, I describe the “momentum principle” (Momentum Leads Price) in that new price and new momentum lows tend to forecast future tradable new price lows) in chapter 2 and tie that together into the fun, impulse sell and impulse buy retracement set-ups in chapters 9 and 10.)

When price hit the initial retest target just under 1,324, we had a positive momentum divergence and price reversed course to the upside, not really pushing to a new significant low (just a retest).

A trader would cover the short at the 1,324 region either on the official test or on the actual price rally up after the reversal candles and momentum divergence.

Before you scoff, keep in mind that this trade profited five to six @ES points (about 50 cents in the SPY), which is $250 to $300 per contract (most traders trade more than one) for a single trade that lasted 30 to 45 minutes.

If you’re not an intraday scalper, keep in mind that this flag and dead cat bounce concept, tied into the “momentum principle,” is applicable to all time frames and markets.

These articles are written with a focus on building your awareness and knowledge of both price principles and trade set-ups (management from entries to exit) so you’ll increase your trading confidence to locate and trade these set-ups in real time in future sessions.

In sum, no trade is 100% guaranteed to work, but the dead cat bounce impulse set-up (composed of a big initial impulse, a reaction/retracement up, and the final downward impulse you can trade) is a good concept to learn and add to your ever-developing trading arsenal.

By Corey Rosenbloom, trader and blogger,

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