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Introduction

Allow me to introduce MEJT: It is chat room shorthand. Me stands for ‘me’; J and T are my initials.

Allow me to introduce the MEJT system: It is a methodology I developed in the summer of 2002 to help me day trade the S&P 500 index. It is based on the principle that market action during certain times of the day can help predict future price action.

And allow me to introduce the track record of the MEJT system: It works.

Since 2002, in various online forums, I have posted predictions – based in large part on the system – before nearly every trading day. Most recently I have made my calls on both www.timeandcycles.com (a subscription-based service on which I also frequently comment intra-day) and on financial-trader-online.tradersdaytrading.com (a free site, on which I post after hours).

Since the autumn of 2005 I have kept track of all the targets that the system says are required to print. As of the end of 2012, a period of over 1300 trading days, there are only 17 days in which the targets remain unfilled. The track record for what I call ultimate signals is even better. There are only two of its targets that remain unfilled.

However, the system is not a panacea. The targets do not always fill when one would like them to, and a large move in an undesired direction can intervene before a target is satisfied.

This book explains how I use the system to help me trade.

What the MEJT system is

The MEJT system is a set of rules that enables one to determine if a market move is sustainable or is destined to retrace. It establishes price targets, as well as areas of support and resistance.

What the MEJT system is not

MEJT is a major help to the day trader and should greatly improve his success rate, but it is an addition to, rather than a replacement for, other forms of technical analysis. The MEJT system is not the holy grail of trading. You cannot write a program that will execute trades based on the system, walk away, and expect profits to pile up in your account.

One reason is that the system does not give precise entries and exits. In this regard it is similar to other indicators, such as trendlines, RSI, MACD and Elliott wave.

Another reason is that, while the targets sometimes are hit on the nose and the market stages a reversal that appears uncanny, more often than not the market goes past the targets (sometimes by a considerable amount). Unlike targets in other systems, MEJT targets tell the trader the minimum, rather than the maximum, one should expect from a signal.

How this book is organised

My first book, The MEJT System, was published in 2011. I received many positive comments, which I appreciated, and also some suggestions for improvement, which I appreciated just as much.

The first suggestion I am addressing is to explain how I use the system in real time and give the trading rules as I go along. In my first book I gave a lot of rules before showing how they were used; some people got overwhelmed. It is not necessary to read my first book to benefit from this one, but people who want all the rules spelled out first can find them there.

The second suggestion was to improve the graphics. I prefer a dark background for my charts in TradeStation. I use lighter colours to highlight the bars that the system relies upon to make its calls. I feel the best way to learn the system is for a reader to have his computer open alongside this book and do the same. Not only are the graphics better, but one can also use the mouse to identify prices precisely. Human nature being what it is, people tend to be reluctant to do that.

Unfortunately, what is easy to read in TradeStation is less easy to read elsewhere. Accordingly, for the purposes of this book I have changed the conventions I use to identify the MEJT bars.

Identifying the MEJT bars

The MEJT system is based on charts with five minute bars. The three bars beginning at 9:05 Central time (one hour before New York time) are labelled am MEJT (am for short), am+1 and am+2. The am bar is identified by an arrow.

The am bar is also the default reference bar of the morning. If am+1 has a higher high and a lower low than am, it becomes the reference bar. If am+2 has a higher high and lower low than both am and am+1, then it becomes the reference bar. If the sequence of these three bars indicates a move in the morning is not sustainable, then prices are forecast to return to the reference bar. The reference bar is identified by dotted lines at its high and low.

Figure A shows the MEJT bars of the morning session.

Figure A: the morning session MEJT bars

The three five minute bars beginning at 12:10 Central time are labelled MEJT, MEJT+1 and MEJT+2. The MEJT bar is identified by an arrow in a circle.

The MEJT bar is also the default reference bar of the afternoon. If MEJT+1 has a higher high and a lower low than MEJT, it becomes the reference bar. If MEJT+2 has a higher high and lower low than both MEJT and MEJT+1, then it becomes the reference bar. If the sequence of these three bars indicates a move in the afternoon is not sustainable, then prices are forecast to return to or through the reference bar. The reference bar is identified by dashed lines at its high and low.

Figure B shows the MEJT bars of the afternoon session.

Figure B: the afternoon session MEJT bars

MEJT is different (very different) from other systems

In most systems a buy signal means one places an order to buy and a sell signal means one places an order to sell. That is not how MEJT signals work.

In the MEJT system a buy signal means that a price target at a higher price has been established. A sell signal means there is a price target at a lower price.

The target may be hit immediately (in MEJT terminology this means the target is hit before prices trade through the reference bar) or it may be delayed (in MEJT terminology this means the target is hit after prices trade through the reference bar). The target may be far away or close by. If the target is too close there may be a valid signal but no trade.

A critical feature of the system is that there is resistance just above higher targets and support just under lower targets. The resistance and support levels are not required to hold, but they frequently do.

This feature of the system makes it very different from other systems. To put it bluntly, if the system gives a buy signal and the market hits the higher target immediately (which is not rare) then the market is at a resistance area. One should be considering whether exiting a long or entering a short position is appropriate, even though a buy signal has just been given.

And there is another feature of the system that makes it unique: It works only for the S&P 500. I tried briefly, and without success, to use it for individual stocks and for other indices.

I also have tried, again without success, to use data providers other than TradeStation. I cannot speak for every data provider, but there are a number of free services available on the internet that have slightly different prices to those provided by TradeStation. When I tried to use those data the system did not work. For most forms of technical analysis a difference of a small fraction of a point means very little. In the MEJT system, a difference of as little as 0.01 points can change one’s prediction. For instance, it can determine whether or not the reference bar changes.

Summary

The MEJT system helps one to identify support and resistance areas while day trading the S&P 500. There is one signal given in the morning and another in the afternoon. Unlike other trading systems, one frequently takes no action when a signal is given but uses the information in conjunction with other forms of technical analysis to plan one’s trades.