Magic Bands that Let You Catch Short Squeeze Rallies and Panic Selling Declines
The Monkey Cycle Indicator has a built-in tool that allows you to know in advance where the next short-covering rally can start.
For every trading day the Monkey Cycle Indicator calculates two very important levels, the critical support and the critical resistance. That information is shown in the right upper corner of each chart:
Those two levels define trading range for the day. The way how the price opens the morning trading session at 9–30 AM EST and interacts with those bands help us to define our directional bias for the day.
Rule 1. If price opens a trading session under the critical support level that level turns into a strong resistance for the whole day.
As you can see on the chart below, NQ futures opened the day under the critical support on 27 Apr 2022 and bulls could not reclaim that level throughout the whole trading session.
What even more important is the rule 2:
Rule 2. If price opens under the critical support and bulls attack that support-turned-resistance level but fail to reclaim it, there is heightened risk for a sell-off caused by forced liquidation of margin longs.
On the chart above you can see that bulls failed to climb over the critical resistance at 9–50 AM EST but failed. Over the following 30 minutes NQ dropped by 300 points!
Why that happened? What drove that sharp relentless decline?
That was forced liquidation of margin longs held by small traders. The Cycle Trader Indicator calculates the critical support, a level under which brokers would force small traders to cut their long positions because value of their margin accounts drops below the required maintenance margin.
Millions of small traders buy and sell futures contracts like ES-mini or NQ-mini. When they open a long or short position their broker requires them to maintain specific amount of assets to cover potential loss if price drops well under the purchase price. When futures drop at the open of a trading session, a broker requires a trader either deposit additional capital into his or her account or close the position. That forced liquidation of a position is called the margin call.
Look at the 5 min chart of NQ mini from 27 April 2022 (above). Bears managed to push NQ under the critical support right at the open of the morning trading session, at 9–40 AM EST. Price kept dropping the whole day but there were two distinctive periods when price accelerated its decline. The first period ended around 11–30 AM EST and the second acceleration started at 3–00 PM EST and ended at close of the trading session, at 4–00 PM EST.
And that is a repeating pattern. 11–30 AM EST is when the London Stock Exchanges closes its trading session at 4–30 PM London Time! The price accelerated decline into close of the London trading session because UK brokers made their clients liquidate long positions in NQ-futures. And that forced liquidation was caused by drop under the critical support level!
Below is yet another example of the same pattern. Bears pushed crude oil futures under the critical support around 10–00 AM EST and declined accelerated until a local bottom was made right at 11–30 AM EST. Again, that acceleration down was cause by margin calls enforced by UK brokers that were about to close their trading session.
In both cases shown above the second period of acceleration was caused by forced liquidation of long positions enforced by US brokers. Because of strong decline in NQ and CL futures held by clients and insufficient funds on their accounts, brokers force them to close underwater positions in order to minimize risks of widening loses over upcoming overnight Globex trading session! Ironically, the deeper the decline gets, the more retails clients are forced to sell their long positions. Drop in price causes margin calls and forced liquidation of long positions drive price even lower causing more margin calls!
Let’s study one more example of brutal sell-off that followed failure of bulls to climb over the critical support level on 12 May 2022:
On 12 May 2022 NQ-mini futures opened well under the critical support for the day. Bulls started a strong rally that peaked around 11–00 AM EST, a traditional reversal time window. But look where it topped! Right under the critical support level!
And look what followed. NQ-mini dropped hard and lost 300 points in one hour. Note that the drop bottomed right after close of London Stock Exchange. That action confirmed the validity of the rule 2: when bulls fail to climb over the critical support what normally follows is a brutal sell-off.
The Cycle Trader Indicator provides a trader with that critical support level. And if price drops under that level a trader may expect that such a drop will most likely cause a strong move down driven by margin calls.
The critical resistance works in a similar way:
On 13 April 2022 bulls managed to push NQ over the critical resistance at 3–05 PM, 55 minutes before close of the day trading session. After that breakout price accelerated the rally and gained 60 more points closing the session at the highest point. What was a driver of that rally?
Those same margin calls! US brokers made small traders cover underwater short positions at the highest level of the day because they had insufficient value of assets securing their shorts!
Rule 3. When price opens a day over the Critical Resistance that level turns into an important support. While bears may try to push price under that level, bulls would normally try to defend that level because as long as they hold price over the critical resistance, they save bullish bias for the day. If they keep price over the critical resistance they have a setup to trigger a short covering rally driven by forced liquidations of short positions.
Price opened well above the critical resistance on 5 April 2022:
Bears tried to push NQ under the critical resistance first at 10–35 AM but bulls managed to defend that attack. However, bears managed to break under that level at 11–35 AM. That happened right at the close of the daily session in London! You can see that bulls tried to push price back over the critical resistance at 1–15 PM but failed.
Rule 4. When bulls fail to re-capture the critical resistance level that creates a setup for a sharp sell-off into the end of the day trading session. It’s no surprise that price started to accelerate its decline on the last trading hour of that day. And now you know the reason why! That decline was forced by margin calls.
Rule 5: when bulls manage to break over the critical resistance during the day the most likely scenario is that rally will accelerate into the end of the regular hours trading session at 4–00 PM EST.
On April 4 bulls managed to push NQ over the critical resistance at 11–40 AM EST right after a trading session closed in London. London brokers made their clients close their short positions at the highest price of the day!
Then we can see that bears desperately tried to push price back under the broken resistance. The fight around that level lasted for two hours and it ended after 2–00 PM. Price accelerated the rally because experience traders knew that brokers would be able to force clients cover short positions during the last trading hour of that day. And as you can see, price reached the highest point of the session at the last minute of the session, at 4–00 PM EST.
Watch a video tutorial explaining how to trade support and resistance levels drawn by the Cycle Trader Indicator:
If you use the Cycle Trader indicator for TradingView you can benefit from the repeating patterns described in this article. If price holds over the critical resistance during the last hour of the session you can make good money on a rally driven by forced liquidation of short positions of less experienced traders. If, in contrast price is moving down under the critical support you can make money by shorting the accelerated part of the decline during the last hour of the regular trading session from 3–00 PM EST to 4–00 PM EST.
Read more about the Cycle Trader Indicator here.
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