Day Trading S&P Futures

June 13, 2014

Daytrading S&P Futures
Linda Bradford Raschke

The S&P market is a trading arena unto itself, which can accommodate many different trading styles. Not only does this market display a different daily profile than the other futures markets, but it has a much longer “length of line” (intraday swings), which offers more trading opportunities. Additionally, there is a wealth of information provided by many internal indicators on the equities market that some professionals like to monitor. In this article, I would like to share some observations, pointers, and favorite trading patterns. However, let me also say that the majority of the professional S&P daytraders I know tend to specialize in just one pattern or trade just one style. This is definitely a market where overtrading can be a temptation.

Swing Trading Concepts
The principles of “swing-trading” are nothing more than applying basic technical analysis to the secondary fluctuation which occur in a market. We can apply these principles to all time frames and all markets, but they work particularly well with the S&P’s, so a brief summary is first in order.

Swing trading is following the price action and learning to anticipate the market’s most probable course of action. We learn to determine the immediate trend by observing whether upswings are greater or lesser than downswings. In a simplified model, we look to enter on retracements in the direction of the trend. An early sign of a trend reversal is a “test” of a most recent extreme price level which usually forms a higher low (or lower high). A trend reversal is confirmed when the upswing leg exceeds the length of the downswing (or vice versa). If a trader enters a position on a “test” looking for a trend reversal, but does not get this confirmation, he should exit the trade or pull his stop up close to his entry price.

There are also periods of market rest, consolidation, or low volatility range contractions. These patterns provide an opportunity for traders who like to trade “volatility breakouts” – a methodology in which one waits for the market to tip its hand with a powerful thrust and then jumps on board in the direction of the movement. This too, can be a form of swing trading, as we are playing only for the market’s next immediate move and not making any longer-term valuation judgments.

When a trader practices the principles of swing trading, he learns to develop a conceptual roadmap in his head. In the S&P market, it is particularly important to learn to think in terms of concepts because there can be so much distracting intraday “noise”. Some more examples of concepts are: mid-morning trends tend to carry into 12:00(EDT) +/- 15 minutes. The best average intraday trends tend to last 45 to 90 minutes before having a countertrend reaction. The earlier a trend starts, the earlier it peters out. There is often an opportunity to play off a reversal of the move into 10:00 (EDT) +/- 15 minutes. The markets tend to be more emotional at the beginning of the day when a good move counter to the initial opening swing can occur. If you learn to think in terms of concepts, you can master the markets instead of becoming a slave to the charts.

Time-of-Day Tips
On average there are only 2-3 great S&P intraday “legs” or swings. Most professionals catch only 3-4 really great trades a week, if that! (Most trades will often be very small wins and losses). So don’t be too harsh on yourself if you feel that you are missing the majority of the movement. Overtrading suckers one into seeing only the trees and missing the forest.

Traders tend to be creatures of habit, and thus it is easy to compile market tendency charts. There are several key patterns which have held constant over time. One common pattern might be: the market rallies or sells off into noontime. At this point, a large percentage of the floor traders and brokers in New York go to lunch and a countertrend correction begins. When the late stragglers get back from lunch, the morning direction tries to reassert itself again. If the afternoon rally or selloff starts too soon, it won’t be able to sustain itself through the end of the day. It will die out around the bond close. However, if there is an afternoon “shakeout”, (usually between 2:00-2:30), then the market can finish in a trend mode into the close.

Do not fade a move into the last hour of the day, for there is no time to exit gracefully if wrong. The odds suggest a better entry price the next day on the probable morning follow through. Moves on Friday tend to end at 3:00, not 4:00, too many traders prefer to flatten out or even up before the weekend.

On many days there occurs what I call the 3 o’clock jiggle. Right around the time the bonds close, there is a great 10-15 minute scalp trade. I believe it occurs as an emotional reaction to how the bonds go out. The trade usually lasts for no more than 10 to 20 minutes, but is fun to anticipate.

Sometimes a good selling opportunity occurs around 2:00. In fact, it is amazing how many good turning points occur on hourly readings, for example, 10:00, 12:00, 1:00. It think this is because people are more conscious of time at these moments, creating a slightly sobering effect.

Many clues can be gained by watching the S&P market in relationship to other markets or indexes. There is very often a leading/lagging relationship with the following: the NASDAQ, the Dow Jones Industrial Average, the Transportation Index, the bond market, and even the OEX’s. These types of observations are another form of tape reading. How is the market acting? Is it holding together as the bonds are making new lows? What does this tell you? Is the S&P failing to confirm a new afternoon low made by another index? This may be a sign of relative strength.

Divergences with other indicators based on market internals make fabulous trading signals. My favorite one is when the S&P makes a higher high but the “Ticks” fail to make a higher high, indicating a potential non-confirmation or sell divergence. “Ticks” also indicate how much buying or selling power there is… in other words, fuel for the fire. (technically, the Tick specifies the net number of stocks on the NYSED whose latest change in price was up or down.) If Ticks are minus 500, there is lots of fuel for an upside rally. If Ticks are plus 500, buying power is running out. In general, pay attention to when the Ticks stop going up or down. From here the market may often reverse. I don’t necessarily initiate a trade on fading these extremes, but I do use it to take profits on an existing position. It is much easier to sense the loss of momentum in a move when watching the Ticks because there is not nearly as much “noise” as there is in the actual price of the S&P.

The divergence pattern can also be used with the S&P premium level. For example, if the S&P contract makes a new low but the premium level makes a higher low, this indicates relative strength in the underlying cash index.

Another intraday indicator I would like to mention is the Trin (the concentration of volume in advancing and declining stocks.) Trin represents the market’s “gas pedal”. The absolute value of the Trin is not really as important as the direction it is trending. If the Trin is dropping from 80…76…74…72…, it indicates buying coming into the market. Someone is stepping on the gas pedal. If the Trin holds at a constant level from here, you can say that there is no selling coming into the market. In other words, there is no deterioration. In general, follow the trend of the Trin. A change in its direction confirms market turning points. (In the first 1/2 hour of trading, the Trin will tend to jump around a lot. Don’t pay too much attention to this indicator until the majority of stocks have opened and had a chance to stabilize).

Many traders can get good entry points but don’t exit very gracefully. In fact, this is a common problem for the very reason that exit signals are never as strong as entry signals. If they were, we would constantly be stopping and reversing – a tiring prospect.

I have always found it psychologically easier to exit too early rather than too late in the S&P’s. I get my best prices by selling longs into strength and covering shorts as the market falls – not after it turns. These days I usually pick up the phone and go in “at the market”. I am happy to take a profit and don’t want it to slip away by worrying about a few extra ticks in a fast market.

Trend Days
Good trend days occur 2-3 times a month. On these days, the market will open at one end of the range and close at the opposite extreme. Trend days most often occur after 2-3 small range days or a period of dull, listless trading. These are the types of days that systematic volatility breakout traders like to capture. Trend days are usually accompanied by heavy volume, extreme advance/decline ratios, and extreme Trin readings which do not back off much during the day.

Do not get anxious if you missed the morning move or tries unsuccessfully to fight it; trend days tend to have a parabolic move in the afternoon. Again, think of the concept: the market will close much further away from whatever the current price is. Pick up the phone and enter in the direction of the trend. Use the previous hour’s opposite extreme price as a protective stop and plan to hold the trade until the end of the day.

Trend days also often occur when there is a big price gap on the opening. It is generally difficult to predict with any statistical accuracy whether or not the market will trend up or down. However, the best entry signal is to buy if the market starts trading higher than the first hour’s trading range and sell if it breaks below it. (Aggressive traders like to “cheat” on this parameter and try and enter a bit earlier). This is also an excellent way to enter breakout traders where the previous day’s range has been relatively narrow.

How to Limit Losses
Any experienced trader can tell you that his greatest losses have been taken on those rare occasions where he substituted stubbornness for a proper stop loss technique. The proper way to trade is to establish where a stop loss will be taken before the trade is made. I recommend risking an initial fixed amount because it simplifies calculations and order entry. (In other words, you don’t have to think about it too much!). You can then pull the stop up tighter if the trades does start working in your favor. If a trader waits until he has a loss before making that initial decision, his judgement is almost certain to be warped by such loss.

The best trades will tend to work right away if the trader has correctly anticipated a pullback or spotted a divergence. The market’s response should be swift and certain. However, no trader is infalliable, and thus a stop loss should be considered to be an invaluable form of insurance – something necessary to running any type of business.

I suggest keeping a daily journal to note your own observations. Also note which types of trades seem to work out best for you. I know one market professional who trades best by waiting for a strong afternoon thrust. He then enters on the first pullback in the direction of the thrust. He claims he loses on balance getting “chopped up” in the morning’s cross-currents. However, another good friend can trade only in the morning and only from the short side. He waits for an initial morning surge, places his shorts, and never risks more than 2 points. This professional has consistently made a most enviable living for the past 15 years. The moral of the story is: he knows himself and what style works best for him, and he always has a resting stop loss order in the marketplace.

Paper trading can never substitute the psychological lessons accompanying putting a real trade “in your gut”. Don’t worry about the exact prices you are getting in or out at, but instead remember to always think in terms of concepts – it is far more important to get the main idea right! Time and practice will then improve upon your execution skills and allow you to build up your confidence level.

Best Wishes for Happy Trading!

Chart Examples
(use your browsers back button to return)


  1. July 15 – This day illustrates some key points.
    1. Note the ~10:00 time window for a potential reversal.
    2. The trend persists until 12:00 on the dot.
    3. and D. highlight two more reversals which occur exactly on an hourly reading

The afternoon rally peaks 1/2 hour before the close. This is because it initially started at 1:00 – a bit early to carry all the way into the close. Most intraday trend moves last 1 1/2 to 2 hours before a reaction sets in.

  1. July 8
    1. Again, 10:00 provided a countertrend reversal trading opportunity. However, unlike July 16, this one only lasted 30 minutes.
    2. It is very likely that the move pushes into noontime.
    3. and D. The countertrend action lasts exactly 2 hours. Because the afternoon rally starts later than the July 16 example, the market runs into the close.
    1. Note the “3:00 jiggle” scalp trade.
  1. NASDAQ Divergences – Over this 2 day period, four separate trading signals were given based on divergences between the S&P and the NASDAQ index. The NASDAQ represents high momentum stocks and tends to lead the S&P at turning points. This phenomenon is more common in bull markets than bear markets.
  2. Tick Divergences – On June 20, the S&P make a higher high at 2:45 which was not confirmed by the “ticks”. This divergence led to an eight-point selloff into the close. There was also a noticeable divergence from the high tick reading of the previous day’s afternoon.
  3. Breakouts after Narrow Range Days – The vertical lines at the bottom of the chart signal when the daily range has been the narrowest of the last seven days. Range expansion generally follows range contraction, providing a good opportunity for those who like to trade breakouts. On this chart, six out of nine days following an “NR7” or narrow range led to great “trend days”, or days where the market opened at one extreme and closed at to opposite.