It looked like we were going to get a powerful trend day after the "gap and go" this morning. I stopped out of a trend day trade in the late morning hours as price consolidated and then dropped through the support of the 20 EMA and the lower Bollinger Band. Losing comes with the territory (but it always sucks).
At the moment (1pm EST), it looks like we have formed a narrow trading range that continues to move down. We have yet to cross the 50 EMA. If we do, it's likely that the trend day bias is kaput.
If we break through the upper channel, we may have a powerful move up. It's wait and see time right now. Aggressive trading is probably a bad idea until things get resolved.
I think a lot of people (including me) were anticipating a powerful trend day today. We had a big gap that refused to fill even a little bit. A big downward impulse followed with new TICK lows.
A slight pullback occurred and then another downward thrust with a fresh new TICK low. Advancers outnumbered decliners by 2,300 at that point. All signs pointed to a trend day.
But price started oozing upward eventually breaching the 20 period moving average and is testing the upper Bollinger band as I write this.
What caused price to unexpectedly reverse and start heading upward?
Looking back a few days we can see a level of support that formed on the 30 minute chart.
Once the price of SPY reached that support level, it bounced and headed upward. It's still going up as I write this.
We'll have to see how powerful this level of support is. Will we get a "broken" trend day as price reverses.
Watching different time frames can help you to determine targets and stops and allows you to have an upper hand as price makes seemingly random moves.
Here are a couple of recent comments about Zacks's Research Wizard that are in response to my post a few weeks ago.
I'm guessing this is the same "Anonymous" who offered to post his return on a weekly basis:
During the past six weeks, one of my better strategies in RW selecting 8 stocks per week ran -9.5%, Fridays to Fridays, -14.5% of which was during the past three weeks. YTD, during the past 44 weeks the result was 137%, Fridays to Fridays, including staying in the market during the four volatile weeks in February, when I stayed out, triggered by the 4.5% drop in the DOW. As stated earlier, when you invest rigorously from Mondays' closes to Mondays' closes, your result ends up at about 75%-80% of the result RW shows you would have gotten. This result excludes the transaction cost of the 8 stocks in the portfolio, about half of them stay two weeks or longer in the portfolio.
It is relatively straightforward to test with RW under which market conditions the Zacks rank 1 and 2 stocks produce ineffective results. Jeremy Grantham's latest quarterly October newsletter spelled it out: "As we have demonstrated to our clients in earlier cycles, earnings estimates in particular merely follow the market up (not the other way around, as one would hope). So it is a law of nature that strong estimates will abound after a major market rally. The earnings and economic growth estimates in such cases are usually throwaways". Hence, when the market runs down in high volatility, I don't use RW to pick my stocks. During such a time, the earnings and growth estimates are usually throwaways as Grantham states. I estimate that to be about 30% of the past ten years. The onset of these periods do usually precurse themselves by a growing VIX and/or the first time that the DOW drops 4.5% or more in one day. For the rest, I find RW a money machine if you have the proper strategies and always buy and sell at Monday closes.
CWatts also chimed in with his own opinions about Research Wizard:
Scott, I totally agree: "There is a real lack of support for such an expensive product. I think it would really help to have a user forum available. Any sort of communication on a weekly basis would be great." What's with that? It makes no sense. I got into the Motley Fool Pro as a charter member and found the support was great. I wasn't so impressed with the profits their recommendations were providing. Still, I felt that support, encouragement and information was abundant from the Pro community and Fool staff. Zacks seems to say, "We've got your money. Now you're on your own." It is almost as though they are assuming they will have no return customers because they are doing nothing to foster loyalty. A community of Zacks Wizard users is really needed. If Zacks has no interest in fostering it, how can it be done?
I've had good weeks and bad weeks using the Zacks Wizard. But in the Last six weeks I've gotten creamed in excess of $50,000. Part of the problem is my own. After a couple bad weeks I decided to sit on the sidelines in cash for a little while, just in time to miss the biggest gain in months. I was up nearly thirty percent for '09 when I started using Zacks. I'm closer to 10% now. That hurts. But I can endure losses if I have solid assurance that the swcreens are accurate and you can make serious money if you are faithful to the program. But it seems to be hard to find anyone who has continued using the Wizard faithfully for several years. Do any of you know of independent careful critiques of the Wizard? I want to believe but I don't want to wipe out in the process.
The website Verticle Solutions provides a real time gauge with a proprietary alogorythm that determines whether the current day's structure indicates we are trending or in a range bound environment.
I look at it a couple of times a day as another way of monitoring market activity. It's an interesting tool and I like anything that has colors and arrows. I do like my gauges.
Today started with a gap of over 1% and good earnings news from Intel which are often catalysts for the formation of a trend day. Trend days can make your week or even your month if played correctly so it is important to be able to identify one early in the day so that you can take advantage of the easy pickings during the rest of the day.
If you just focused on price alone, you really have no indication that today is not a trend day (as of 12:00 pm EST). We had a large opening gap, and price hasn't crossed the 20 period moving average (green line). It seems that the bulls are in complete control, and the news is hailing DOW 10,000 before it even happens.
But when you look at market internals you'll see a different picture. The NYSE TICK is a great tool for understanding what is going on "behind the curtain".
I've posted a capture of the NYSE TICK which shows that caution should be taken in assuming this is a trend day. Usually on a trend day you'll see extreme readings on the TICK (above or below 1,000). The green line is +1,000 and the red line is -1,000. As you can see, the TICK has not reached extremes on either side of the spectrum. To me, it looks weighted on the sellers side, especially during the first couple hours of trading.
Currently, it looks like TICK is hovering around the "zero" line which indicates this day is more like a "range day" than a trend day. Using tools like the TICK can help you make better decisions about price structure and allow you to determine how aggressive you want to trade. On a trend day you want to go nuts and risk a lot to make a lot. On a range day, caution is the theme of the day and you should trade much more conservatively.
As always, it will be interesting to see how the day plays out.
I haven't used Zack's Research Wizard for over two years and I haven't written about it in at least that long, but I consistently receive comments and questions about the product. Curiously, a Google search of Zack's Research Wizard lists StockPunk as second in rank under Zack's own website!
There are a many great discussions about the product on a couple of my posts. The best debate has probably gone on after I posted my opinion about the product after using it for 6 months. You can see the post and read the comments here.
I no longer use screening or buy individual stocks, but I still find the world of stock screening fascinating. My love for the markets and trading started with fundamental screening. I still enjoy reading Charles Kirk's posts about his Stock Screen Machine.
Recently, an anonymous commenter offered to post his impressive returns using Zacks Research Wizard. Here is his comment: I have four RW strategies that produce separately and combined a CAGR of ~75% over the past 10 years if you buy and sell the weekly selected stocks on Mondays at close. One of these strategies selects some 8 stocks each week. I am willing to send Scott this selection every Monday for the next three months so that he can publish those on his secured site while I will stay anonymous. If the DOW drops more than 4.5% on a day, we use this as a stop loss and stay out for the next 20 days.
I'd be up to posting his results on a weekly basis if other readers are interested. Let me know through the comments section of this post or through e-mail and I'll let the poster know that there are readers who are interested.
The day opened with a .30 gap in SPY which according to backtesting research has a pretty good chance of filling. Usually I'll attempt to fill any gap under 50 cents because gaps of that size have good edge and usually fill.
But today I decided to wait because of what happened yesterday. Many day traders trade only in the moment and ignore the previous day's (or even the previous hour's) action. However, the structure that sets up yesterday often continues into the next day as it did today.
Yesterday we got an excellent bear flag into resistance near the close. Not only was the 50 period exponential moving average acting as resistance, but price also stopped at the 61.8% Fibonacci retracement (see next chart).
The bear flag began its decent with a big down bar 25 minutes before the close, but as often is the case, some sort of buying programs clicked in and killed off the move in the closing minutes of the day.
The pattern still remained viable, and as we opened the day with a gap, you should have been hesitant to jump right in given the dominant bear flag that had formed into the close yesterday.
On this chart I've drawn the Fibonacci retracement which allows you to determine a stop loss for the bear flag (if you're wrong). In this case, your stop loss would have gone above the 61.8% retracement (slightly above 107.71). You could have entered after the doji formed 10 minutes after the open today.
To set your target you could have drawn a Fibonacci extension on yesterday's bear flag (next chart). You could target the 100% Fibonacci extension which would be the completion of the bear flag. Notice that price continued through the 100% extension and nipped the 138.2% extension.
Aggressive traders could have held on until they saw a reason to get out (that nearly engulfing up candle would have been a sign that it was time to leave the trade). Or you could have targeted 138.2% which would have been a successful target (to the penny).
This may all seem too complicated to perform in real-time, but I assure you, with a little practice, it becomes second nature. It just takes a few seconds to look over patterns and draw Fibonacci retracement and extension lines. The information they provide can dramatically increase your confidence to put on trades and to formulate realistic targets.
Many traders struggle with when to get into a trade and when to get out. By studying price structure you can really improve your execution and increase your accuracy. Understanding yesterday's price action is also invaluable when trying to understand the price action today.
Occasionally I like to peruse my old haunting grounds to see how I would be doing if I still traded using stock screening techniques. As many of you know, the Zweig stock screen was my "bread and butter" for several years and it performed marvelously for several years averaging a 50% return for me each year. I was using a "tweaked" version of the screen that simply ranked the Zweig screen candidates by their 26 week relative strength (as compared to the S&P 500) using AAII's Stock Investor Pro.
I then chose the top 5 stocks listed in the screen (the screen averaged about 10) and bought them Monday morning. I held through the week without using any stop losses. I would re-evaluate the screen on Sunday and if any stocks dropped off the list, I would sell them Monday morning and replace them with new stocks that qualified for the top 5.
I sometimes held stocks for just a week, but in most cases, the stocks stayed on the screen for weeks and months at a time. It was a very simple way to trade using mechanical methods which allowed me to work full time during the day and still enjoy returns that handily beat the indexes. But things fell apart for the screen in 2008, and AAII's version of the screen lost 34% over the year. Before 2008, the screen's worst performance since 1998 had been a 17% gain in the awful market of 2002.
By mid-2008, I knew that I would have to change my trading strategy if I was going to be able to eventually trade for a living. A losing year just wouldn't cut it for paying the bills since I didn't have an abnormally large chunk of equity. So I made the switch to day trading which I felt gave me much more control over my trading and my equity curve.
I'm still learning, and the transition hasn't been easy by any means. The fast pace and emotional stress of trading intra-day takes its toll. It is much more complicated and requires a huge amount of effort, learning and dedication. I sometimes question the switch I made (as many of my readers have done). So once in a while, I'll "take a peak" at some of my former methods just to see how they're holding up.
I'll have to admit that I was completely surprised to see that the Zweig method has performed poorly this year--down 17.4% YTD. This is the type of environment where the stock screen usually thrives--an unrelenting bullish bias after the market bottoms out. In 2003 the unmodified screen returned 89% with monthly re-balancing.
That fact gives me pause that the rally we are seeing today doesn't necessarily indicate that happy days are here again. Something is not quite right fundamentally if the Zweig screen is down for the year after a 40% rally has taken place.
Today's action provided several opportunities for profit, but more importantly a clean Elliot Wave pattern formed throughout the day. I like Elliot Wave patterns because they provide several important areas where traders can find an edge.
Understanding Elliot Wave patterns intra-day has helped me become a much more patient trader because they provide good entries, specific stop-loss areas, and logical targets. Take a look at the chart at the left (you can blow it up by clicking on it). The chart was captured about 30 minutes before the market closed.
You can see how the entire day unfolded into a "story" with predictive value--taking what most people see as random price movements and creating a sort of "crystal ball" that gives clues as to what will happen next.
I used to jump in on any pullback to a moving average. Now I try to wait for an ABC pullback to complete before I take a trade. Today, we got a pullback after a 3rd Elliot Wave (big number "3"). I wanted to take a trade as soon as price moved back to the 20 EMA. You'll notice that price bounced of the 20 and began heading upward. But I held off because I was expecting a larger wave 4 to form and I new that wave for usually created an ABC pattern.
The ABC corrective pattern did indeed form. If I had taken the trade too early, I probably would have stopped out--even with a stop comfortably below the 20EMA. Instead, the ABC pattern completed with a "hammer" candle forming off a bounce on the 50EMA. This provided a terrific trade with edge. A stop placed below the 50EMA with a target of the top of wave 3 is what Elliot Wave would suggest as a "wave 5" trade with a 2 to 1 risk/reward ratio.
You'll notice when that trade achieved its target that price continued to move up quickly as the sellers who were shorting ended up buying back their shares. I held my trade as their stops were triggered creating additional gains for the trade.
Over the past couple of weeks the indexes have really struggled to create good trading opportunities. They have often opened with a large impulse up or down and then consolidated for most of the day with very little movement.
Today has given us another example of this. From the opening bell, daytraders have had little opportunity. The gap didn't fade at all. Then we got some indecision and then a solid move down.
But that soon fizzled out and we got a retracement back to the 20 period moving average. After that price just bounced up and down most of the day as the Bollinger Bands narrowed.
On days like these, I try to find other things to do while I have the market "in the background". I'll often take a laptop with me while I work on the car or clean part of the house. A solid breakout might peak my curiosity, but as the market "coils" I'd rather be doing something productive than watching it compressing all day long.
I've had several e-mails lately wondering why I use candlesticks in my charts. There is nothing magical about candlesticks, but they do provide information that can be used to understand some of the underlying sentiment or emotion in the market. Plus they look cool.
Adam Hewison has a terrific free video on how you can use candlestick formations in your trading. Right now he's offering a free e-book on understanding market movement using candlesticks. He does a much better job than I can in explaining what candlesticks are and how they can benefit you. Check it out here.
Today had a good lesson for me on why having a bias is counterproductive as a trader. In Mark Douglas' great book Trading in the Zone he emphasizes the importance of understanding that at any moment in the market anything can happen. Every moment and therefore every trade is different from the last.
This morning I ignored that good information and created a bias in my mind that caused me to trade against an known edge. I saw that the futures were down over a percent in premarket trading and instantly I assumed that we were going to have a down day--possibly a trend day down.
When the market opened up, the gap was less than a percent--about .80%. My trading edge says that a .80% gap is right on the edge of a good gap fade trade. So I should have either been fading the gap, or waiting to see what happened over the next few minutes. I did wait, however, I was so blatantly sure that we were going to have a down day that I sold short after what I assumed was confirmation--a couple of long wicked candles and a bounce off of a Fibonacci level.
The market kicked my buttocks quite thoroughly with a strong move against my position and stopped me out with a loss. The lesson that I learned--my bias kept me from seeing the reality that the market was communicating and caused me to make a trade that had no edge.
This morning gave us a brilliant example of why patience pays off when you are trading stocks. SPY provided a gap fading opportunity from the opening bell.
I've found it important to avoid hesitation lately when the market opens higher or lower from the day before because the price often seeks equilibrium quite quickly and traders who hem and haw over their entry decisions are often left in the dust. So it doesn't pay to be patient when entering a gap fade trade.
What does pay is waiting a bit to see where the trade goes once the gap is filled. In today's example, the gap was filled within pennies within 10 minutes. However, if you were to hold on for the next 15 minutes you could have doubled your money by holding on through the gap and taking part in that large red candle down.
The nice thing about this trade is you could have easily moved your stop loss to break even when the gap was almost filled. Even though price retraced a bit, it never really threatened the opening price and you would have had a no-risk trade that went on to double what you were willing to risk on the trade.
I wanted to point out a great setup on a trade today that eventually fell apart. I credit the buyers who remain able to push this top-heavy market higher yet.
I've detailed a "short" trade in SPY that set up today at 3pm EST. Here's what the trade had going for it (click on the chart to see more detail).
I wanted to point out a trade that appeared today where everything pretty much lined up perfectly. It isn't often that the trading gods offer such nice setups.
This morning DIA formed a bear flag with a doji candle at a 50% Fibonacci retracement as the moving averages crossed over. This all occurred after a new price and momentum low for the day.
Whew. When the market gives you an opportunity like that you've got to grit your teeth, put on a larger than normal position and (hopefully) watch the money roll in. With this trade, you wouldn't have even endured any sort of heat as the trade pretty much did everything it was expected to do.
If you missed this trade, or hesitated to take it because it wasn't "perfect", it pays to look over an example to help prevent missing future trades. These patterns appear on all stocks and burning them into your mind will help you be ready the next time one occurs.
I have a notebook with patterns that I traded (or missed) and I often refer to it during the day to keep me from taking trades that aren't good and to force me to take trades that are.
What a week! I was looking for a big down day that never came. Fortunately, as a day trader, I can take advantage of unpredictable moves in the markets without the emotional stress that holding overnight creates.
Adam Hewison's latest video attempts to explain where we are in the price movement of the S&P 500. Here's his explanation of the video:
With the S&P 500 making new highs and as world equity markets following suit, the question becomes how high can we go?
In this short video on the S&P 500, I outline some mathematical upside target zones that I am looking at for this market.
You can watch the free video here.
For most of my life, I've been terrified by the prospect of running into a yeti. After following his Twitter posts for a while, I find he's not the spooky ape-man I once thought he was. In fact, he's a bit of a philosopher. A sample: every day is gift. Sometimes not very good gift though, like oven mitt soaked in pee.
You can follow Bigfoot's daily ramblings here: http://twitter.com/hellobigfoot
Pre-market futures are up over a percent as I write this early Wednesday morning indicating that we may be in for a trend day if things hold up.
Yesterday on SPY the bulls held their ground and were able to pop price up above the moving averages with a little hammer type doji candle. As I've said previously, if the bulls can continue to push things up (and it looks like they might with this morning's action) we may see a rather large push in that direction as the bears get out of the way and as bearish stops are taken out just above the moving averages.
I was extremely bearish going into this week thinking that we would see a large move down possibly testing the March lows by Fall. However, we can't allow our biases to overtake the reality of the market. We aren't moving down and it would be foolish to start taking short positions here because the market "has to go down". Price is telling us (at least in the short term time frame) that price is going up whether we think it should or not.
The DIA is a little less clear as we have a doji candle right at the compressed moving averages. A drop 
below the 20, 50 and 200 moving averages would be extremely bearish and price would likely drop to the next area of supprt around 78.00.
Adam Hewison of The MarketClub discusses the DOW today in a free video titled Important Dow update, July 14th. In the video Adam shows how to use a Fibonacci retracement tool to determine where we are at in the swings of the market.
I've found The MarketClub's videos to be extremely helpful in getting a "bigger picture" idea of what's going on in the markets.
He covers several markets that I don't follow (ie commodities) which helps me develop focus for my intraday trades. I think it's very important to have several sources of information to create an edge for your trading and I've been very impressed with what The MarketClub offers. Check it out.
I really screwed today up. After my first awful trade, I should have gotten long right away. Instead I hesitated as prices continued to rise.
My first long trade didn't occur until about 2pm after 3 nice dojis had passed me by.
That would have been OK, because there were other opportunities to make money (every green circle), but I turned those opportunities into losses because I either held too long or moved my stop too close.
You can see that price rarely went below the 20 period moving average. When it did, at didn't go past it much and it never closed below. But I stopped out each time because I had my stop way too close.
Adding insult to injury, I played that last doji hoping for a new high on the day (which we got). But I accidentally went short instead of long. I got out without a huge loss, but I watched as price went to where I expected it would--without me.
If anyone tries to tell you that trading is easy, they're lying.
So, now SPY is exactly at resistance in the tightly wound 20 and 50 period moving averages. Tomorrow should be very interesting.
My first trade of the day worked out nicely. It seems like gap fade trades have been working out really well lately. For a while I couldn't get a gap fade to work to save my life.
Today's nearly stopped me out with that violent push up on the second candle. But two long legged dojis later we filled the gap and more.
My second trade of the day sucked. I thought I had a perfect setup with a doji at several points of resistance after new lows on the MACD and the TICK. As soon as I took the trade it went against me with two mean up bars. Ouch.
I got really aggressive with that trade and risked 2% of my account. It is all gone now. *Sniff*
In retrospect, I should have been much more careful in my aggression level. Looking at the daily chart of SPY gave us a clue as to what might happen today.
The 200 day simple moving average has been acting as support for several days and the bears have been unable to push price below it on a closing basis. After 3 days of the bears losing out on their plans, it makes sense that the bulls would be able to push things up.
Now we'll just have to watch the 20 and 50 period moving averages. They are about to cross forming a formidable barrier for price (around 900). If the bulls can't push above the averages, we may have a shocking move down. If they can push it above we could have a big move to the upside. Keep your eyes peeled.
After a sucky day like today, I really appreciate being able to go over the day from someone else's perspective so I can see what I missed and also clarify some of the day's events.
Corey Rosenbloom is providing exactly what I need in his Idealized Trades Reports subscription service. When Corey was mentoring me, I asked him if he could come up with a report on a daily basis that would detail his thoughts about the structure of the day. He put together a report that allowed me to veiw the day from more of a professional's perspective.
Corey uses trading "concepts" instead of mere indicators to understand what the market is doing and to get an inside glimpse of the internals of the market.
Corey is offering his Idealized Trades for the ridiculous price of $27 per month. I think it's a bargain and I told him he should charge more. I've paid much more for services that offer far less. Lately his newsletter is averaging 6 pages of up to date information about the market day.
I would highly recommend the service to anyone who wants to better their trading abilities. The lessons focus on the ETF for the S&P 500 (SPY) but they apply to any trading vehicle that you use.
I've been extremely bearish all day today and as a result I have given someone who is bullish a lot of money.
I wanted to point out a nearly perfect cup and handle that is forming on SPY. I'm still bearish, so we'll have to wait and see if this pattern plays out to the upside. It probably will just to tick me off. I hate the market.
Yesterday I wrote about using Fibonacci Price Extensions to set price targets and I wanted to show you one from today that worked perfectly. Remember, on a bull flag, the initial impulse is followed by a pull back (often to a moving average). Drawing a Fibonacci Price Extension from the beginning of the pole and then to the end of the pull back gives you price targets based on Fibonacci numbers.
It is often uncanny how well this works as you can see today. The bull flag produced a price run that stopped at the 100% price extension to the penny and then leveled off there for 30 minutes!
I wanted to point out how I used Fibonacci numbers to make my final trade today. Initially I was playing for an Elliott Wave pattern as price plummeted and then violently retraced. However, I noticed that price pretty much stopped at Fibonacci's 50% retracement level. This gave me a concrete area to place my stop once I was in the trade which I took as price hovered around that 50% level.
I placed my stop just beyond the 61.8% level because I knew that if the price broke out from there, the edge on this trade had disappeared. After placing my trade I used a tool in Tradestation to determine my target for the trade called the Fibonacci Price Extension.
This is capture of my actual trade at the end of the day including the Fibonacci Price Extension. I plotted the extension from the beginning of the swing down and then up into the swing high--or the "flag". Tradestation plotted the "extension" of the price from that point giving me Fibonacci targets for my trade.
I expected a larger move than actually happened. But when price stopped right on the 61.8% extension twice, I knew it was time to take my profits and run. Price hung out there for one more bar before heading up the rest of the day.
Normally, my target for a "flag" like that is the 100% extension. But when you see price fail to break levels above, it might be time to take your profits and run.
The trading day has about an hour left, but I'm done for the day. This was a very difficult day for me. It was my worst day trading so far this month.
I started off with a stupid trade--trying to fade the opening gap. I thought it had good prospects of filling so I wagered more than I usually do on gap fades. Apparently it is unwise to fade gaps on Fed days. I noticed a Twitter post from Scott Andrews that the gap today had low odds of filling about an hour after I stopped out.
No big deal. Now odds favored a trend day and I had plenty of opportunity to earn back my money. I took the first pullback near the moving average and held on until it dipped below and I couldn't take it any more. Another large loss.
Then price broke above the 20 and I took that as a continuation of the trend (price hadn't broken the 50EMA). That trade at least went in my direction for a few minutes. And then I stopped out of that one for a large loss. Ouch.
I then switched to the DIA chart because my trend day concepts weren't working, and I saw the moving averages attempting a crossover. I made a large trade and it went in my direction quickly and I envisioned making back my losses for the day. And then the market went nuts after the Fed announcement.
It went nuts in the direction of my trade, but unfortunately, for a split second price rose up above the moving averages and triggered my stop by 2 cents and then headed down hard. How frustrating. Instead of making back my losses (and probably a lot more), I was stopped out with another loss. I decided to quit for the day.
Corey Rosenbloom sent his condolances because of my sucky day along with a tip on an aggressive "Fed Day Trade". I took the trade hoping to make up some of my losses. Fortunately, I was able to make up nearly all of my losses with one final trade.
I think I've learned my lesson about getting too aggressive on a day that the Fed makes any decisions. However, knowing myself like I do, I'm thinking I'll probably make all the same mistakes again. Stay tuned.
I've learned after some disastrous trading days that the day following a strong day doesn't typically work with my style of trading. What does work, however, is fading price extremes. On a day that was basically flat, if you were to fade every time price neared a Bollinger Band with a stop close by on the other side, you could have executed 12 successful trades today.
It is a good idea to avoid focusing on just one way to trade. Having a "toolbox" full of different types of trades can mean the difference between getting chewed to bits on a day like this, or making some decent money.
I quit the day early claiming that the trend day had fizzled. It hadn't. It turns out that we got a near perfect trend day with just a couple of touches on the 50 EMA and a close at the low of the day. It sure didn't look like that's what was about to happen as we got that bar that peeked just above the 50EMA with 25 minutes left in the trading day. But I guess that's where sticking to the plan pays off. I didn't, and I missed out.
The day isn't over yet, but I think I'm done trading and I wanted to point out some things that happened today. Today started with a big gap from Friday's close and continued downward with a lot of pressure--our first clue that this could be a trend day. I warned Twitter followers that it was probably a bad idea to try and fade that gap.
I've circled what I think are the best short trades of the day--trades with edge in the direction of the trend (orange circles). Price then consolidated into a descending wedge and I thought it was time to load up and wait for a break below the wedge for a powerful move. We got the break, but price didn't move too terribly much before turning back around and then flat-lining.
Notice how the bottom of the wedge held all day as support (blue arrows). At this time 3:30 pm EST, it looks like the day is either going to remain flat or reverse, so I'm going to take my meager winnings and quit for the day.
After moving to our new house six months ago, I've become sort of a bird nerd. We live on the edge of some woods and routinely see birds that I haven't seen my entire lifetime living in the city.
Today, my daughter found an injured bird on the side of our house. It was lying upside down with its beak open and looked dead. After looking a bit closer we discovered that the bird was alive.
I picked it up, and it was limp. It offered no resistance as I turned over to look for any signs of injury. It seemed as if it had been paralyzed somehow. I assumed it had been hit by a car--maybe on a nearby highway, and had managed to fly a mile to our home.
I assumed that the bird was a blue bird because, um, it was blue. After looking it up, we decided that it was an Indigo Bunting. We brought the bird inside and I got a pipette that my daughters use to feed their tadpoles and filled it with water. The bird couldn't move its head so I let a little bit of water dribble onto its beak. It quickly slurped up the water and looked a lot more alert. We took it back outside incase it wanted to get airborne.
I continued to feed it water and after a few minutes the bird got back on its feet. Surprisingly, it stayed put in my hand and made no indication that it was frightened as I continued to let it drink. My other daughter came out of the back yard to see what was going on and my wife came outside with the camera and took a few shots.
After about 10 more minutes the bird suddenly looked around--like he had just come out of some sort of daze. I released his bowels into my hand (how nice) and took off into the trees.
Options expiration days are hard to trade, and I usually stay away unless something interesting develops. Today, we formed a very nice Elliott Wave that created some trades that might have not been obvious otherwise.
Once that big 3rd wave shows up, the trades become clear. A short on that doji candle right on the 200 SMA (near the number 4) with a stop right above the 50 EMA could have resulted in a nice gain as you rode wave 5 down.
These patterns happen so regularly, that it really develops a trading edge that is hard to beat.
SPY is forming an ascending triangle around yesterday's highs. Notice again how yesterday's highs are providing support and resistance (green arrows). A break above the triangle could signal a conservative buy. An aggressive buy would be around the bottom of the triangle hoping for a move up.
I am continually amazed at how accurately support and resistance levels play out during the day. I've highlighted yesterday's close (small dotted blue line) and yesterday's low (larger dotted blue line) to show you how many times price tested those areas throughout the day (the day isn't over yet).
The red arrows point out where price pulled back to resistance levels and the green arrows point out support. Using those level can provide excellent places to place protective stops (I usually place a stop just beyond the levels just to be safe).
I threw in an Elliott Wave pattern for the day as well. After some dumb-headed morning trades, I was able to make a few bucks with the Wave 5 trade. Notice how you could use several support levels if you took that Wave 5 trade.
You had the 20 and 50 moving averages and both yesterday's close and yesterday's low all providing support for the price. Over a 35 minute period nearly every one of those support levels was tested with yesterday's close providing the line that couldn't be crossed before we made a nice move up past the highs of the day.
SPY has been above its 20 day EMA (green line) since early March and today was the first day that we closed below. It wouldn't be out of the ordinary for price to make a beeline for both the rising 50 day moving average and the falling 200 period moving average. If those resistance levels are broken there isn't much to prop up the price.
Notice also how the MACD had been declining the entire time that price has been going up. This should provide some "pause" for those of you who are ridiculously bullish. This would probably be a good time for those holding long positions to lighten up.
I was anticipating that there woudn't be much trading opportunity today, but we got several decent trades throughout the day. I only capitalized on my third trade after making silly mistakes on my first two.
The down move around 11:00am should have clued us in that an Elliott Wave was forming. The consolidation (blue dotted lines) provided a perfect place to take advantage of the 3rd wave. I missed this trade because I wimped out after the breakout. I just watched if fall as I wished I had moved more quickly.
The end of wave 4 provided another perfect doji setup for the 5th wave drop. I got into this trade late, and then held on after price made new lows hoping for lower prices. I stopped out at break-even as price came back and took out my stop.
The "abc" pattern after wave 5 provided a few other trades. I took advantage of one of those to book a decent profit for the day.
As I've made the transition from finding "setups" to understanding market "concepts" I've found more opportunities throughout the day. "Concept" trading has also allowed me to vary my position size based on factors "lining up" and providing opportunities with higher chances of success.
Trend days are usually my best days of the month, so I was interested in the opening action today as we had a large gap down. There wasn't much of a pause and the market continued to head downward.
I noticed that when price inched back after the first 20 minutes that it couldn't overcome the resistance that had been support during the first 15 minutes (1st yellow line). I took a position after price bounced off resistance for the third time, waited a few minutes and then BAM, a couple of nice red candles.
That was my only trade for the day as price formed a channel and bounced around all day before breaking out to the upside and frustrating anyone who was short and hoping for a trend day. There were many internal indicators that were screaming that this wasn't going to be a huge trend day down (including the MACD), so I didn't take advantage of the couple of other decent scalps that showed up.
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