This piece will focus on a shorting opportunity we identified in the S&P.  Many active traders think it is their job to wake up each day and trade.  The astute trader knows it is their job to wake up each day and search for low risk, high reward and high probability trading opportunities.  If that opportunity is found, the astute trader applies their rule-based strategy and executes like a robot, very little thinking (if any) involved.

Taking this approach gave me two important benefits.  First, I became emotionally detached from the market and my trades as my focus was on other things that were so much more important.  Second, I began “smelling the roses” early in life, spending most of my time doing things that were so much more important than sitting in front of a computer screen all day.  Sitting and watching your trades keeps the largest risk in your trading world alive, which is human emotion (you).  Eliminate that risk with proper rules based on the objective laws of supply and demand and disciplined execution.  This means planning your entire trade and letting an unbalanced supply and demand equation naturally move price back to balance.

Let's take a step-by-step look at our trading opportunity.  The following chart is a small timeframe chart of the S&P futures.  This market is the mother of all global equity index markets as most stocks around the world move in the direction of the S&P.  Whether you trade futures or equities, properly identifying quality trading opportunities in the S&P is equally important.

Area “A”
Area “A” represents a supply (resistance) level.  This is an area where the chart tells us supply exceeds demand.  We know this because price could not stay at level “A” and had to decline from it.  If my statement about supply exceeding demand at level “A” were not true, price never would have declined from it.   It would have kept trading at that price level, but the key point for you to understand is that it could not.  It had to decline because supply exceeded demand.  The exact pattern we look for that represents supply is a Rally-Base-Drop as seen on the chart, “A.”  This is not a Drop-Base-Drop; we do not look at this as supply because they are found in the middle of moves and typically do not work well.

Area "B"
The decline in price as mentioned above confirms the supply level at “A.”  More information about the level of supply/demand imbalance at “A” can be gained from observing the rate of decline during “B.”  The more rapid the decline in price, the greater the supply/demand imbalance at “A.”  This is key information as it helps us quantify probability.