How I Trade (part 4): Interview with Charles Pennison

Charles Pennison is a full time, at home trader who makes his living trading the S&P E-Mini contract.  In my interview with him, we start with the big picture and we quickly make our way into the specifics of how he find good trades.  He then talks about how he gathers a broad picture of the markets before diving into his daily trading.

Tim Bourquin: Charles, what is the most important thing you watch when you are trading?

Charles Pennison:  Cycles.  I really pay attention to cycles.  You have the seasonal cycle, for instance, mid-March to mid-May is typically a bullish cycle in the market.  Market structure meaning if you’re starting to get higher highs and high lows around mid-March, high probability trades would be in the long direction during that period.  Then you get the monthly cycles and, of course, most people know about the end of the month bullish cycle when a lot of mutual funds and retirement funds are buying into the equity market.  And then you have a shorter term cycle that I pay attention to first discussed by George Douglas Taylor back in the 1950.  Back then, he calls it a three-day cycle, and back then maybe it was really a three-cycle, but nowadays it’s more like a two- to five-day cycle where, just quickly, you’ll have a strong trend day and then you’ll have several days of price consolidation where the market just kind of bounces around in a small range.  And then you have another trend day and it goes and finds another equilibrium zone to play in.  So that’s the type of cycle I pay attention to.  So you need to know the difference between are you in a trend day or are you in a day where the market is just going to bounce around in a small range.  You really need to pay attention to that.  Based on that I answer the question, “What type of market am I going to be in today?”

Tim Bourquin:  Next, I talk with Charles about equilibrium zones, how he finds them, how he maps them on his charts and then how he uses them to support as support and resistance zones.  We then talk about the timeframes he watches closely.  We also talked about how he uses the NYSE tick indicator to look for changes in the short term trend.

Charles Pennison:  Well, first what I do on a 30-minute chart, I look for price clusters or those equilibrium zones and those zones will have well-define upper and lower limit.  The upper limit will be resistance and the lower limit will be support.  And you’ll find that the market will test both the upper and lower limits throughout the day, then I go to the one-minute chart.  The 30-minute defines the overall support and resistance prices, and then I go to the one-minute chart too for timing.  On a one-minute chart, I have the ES futures and I have the New York Stock Exchange tick indicator.  And I use the tick indictor to show me where the market may be changing momentum from a bearish phase back to a bullish phase and vice versa.

Tim Bourquin:  Charles then talks about what other specific indicators he uses and how a few things put together draw a picture for him and shows him where his entry points will present themselves.  As all great traders do, Charles has mastered the ability to have the market tell him when it’s time to trade and when it’s time to just sit back and watch.

Charles Pennison:  On my tick chart, I have a Bollinger band, a 50-period Bollinger band and the standard deviations I used are plus 1.5 and minus 1.5 standard deviations around that 50-period moving average.  And I look to see when it’s hitting support, I then start looking at the tick to see if it starts trending back up, showing me that there are buyers entering the market.  Also, I would look to see if there is what I call a bullish divergence; in other words, futures making a lower low while the tick is making a higher low that would be a bullish divergence.  That means that the future overreacted somewhat and the momentum of the equity market is really changing back to a bullish phase.  As the future is testing that support level, it will tend to test that support level several times and when it’s doing that it will make a pivot high.  And then as it finish testing support, it will trade past that pivot high and then it will come back down, I call that the first correction after the bounce.  It tells me on that first correction that I will enter a long trade when you get that first correction.  I look for the tick to trade back down to between minus 200 and minus 400 and hopefully hit that lower standard deviation then.  If it goes that far and hit that lower standard deviation then that is when I enter my long trade.

Tim Bourquin:  I then ask Charles to talk about he was able to go from being a trader where he was for the most part guessing with each trade to becoming familiar enough with the E-Mini market, to know intuitively where it was headed next.  He also talks about something he watches as a leading indicator.

Charles Pennison:  It really comes out to training your brain to see the opportunities in the market because I can remember when I first started, I would look at the E-Mini futures chart, let’s say like a five-minute chart and it just look like mumbo jumbo to me.  It would go up and then for no reason turn around go down, I could just see no reason why the market would just kind of jump around like a jelly bean, but today, when I look at a chart, I can see where the market has potential for changing direction and I know why it’s changing direction.  So you start to see the organization and the chaos and testing, how does the futures market react with certain stock exchange tick movement.  How does that react to the New York Stock Exchange advance decline line?  You’ll find, for instance, the New York Stock Exchange advance decline line will typically lead the futures market by a day or two.  In other words, the futures market if it trades down it will start forming a bottom, but before it trades up from the bottom, I would say a good day to two days, the advance decline line has already been trending up.  So that’s a for instance.  It used to mess me up a lot because I would look at the advance decline line and it would be higher than yesterday even though the futures was making a new low, and it took me quite some time to understand that the advance decline line actually leads the futures market by a good day to two days.

Tim Bourquin:  Some traders do homework after hours, some don’t.  But I ask Charles what he looks at after the market closes to prepare for the next trading day.

Charles Pennison:  It doesn’t take me as long as I used to because I know what to look for, but I really just study the 30-minute chart.  Sometimes I’ll also look on the cash market, the cash S&P 500 chart.  I will look at the daily chart and I will see where, today where is the market in relation to the monthly open.  Let me list all the highs and lows I look at.  On the 30-minute chart, I look at the highs and lows of the equilibrium zone.  I look at the high and low of the overnight market, I look at the previous day’s high and low, and I also look at the 9:30 Eastern Time open line.  These prices will typically act as support or resistance for the futures market.  Just from experience, I’ve observed that and those are the times where when a market approaches them, I’d start to pay attention, I want to see if the market is going to bounce off of them or trade through them and that will determine how I will enter a trade.  For some reason, like a monthly open price, the market will trade away from it in one direction or another and a lot of times in the middle of the month, it will come back and test that open price again and again it will either bounce off of it or trade through depending on the type of market you’re in.  For some reason, it will act as support or resistance from time to time.