All day triangle on SPY

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.

Using candle sticks in your trading

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.

Bias in trading can hurt you

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.

Patience pays off

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.

Bulls won't give up

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).

• A "3 push pattern" into the highs of the day (check out Corey Rosenbloom's take on the "3 push" that occurred today)
  
• A new momentum low
• A new TICK low
• A bear flag into a moving average crossover
• A doji at moving average resistance
• Resistance at 50% Fibonacci retracement (I drew a Fibonacci retracement on the chart to determine resistance and a Fibonacci Price Extension to plan a target)
  
• A possible trend reversal
• A market that is extremely overbought

I took an aggressive short position when I saw all those things line up today. When I see things "fall into place" like this, I get very aggressive and risk much more than I usually do on a trade. I can make my weekly goals with one trade if it goes as planned.

Unfortunately (for me and other sellers), for some reason--whether it's the summer doldrums or big players who won't quit buying--this market just doesn't respond well to the down side.

As soon as price sliced through the moving averages, I knew this trade didn't have the power that I thought it did. I was expecting the flag pattern to reach its target quite readily. I moved my stop to break even because I didn't like the way price was "flowing". I stopped out with a small gain.

Soon after that, the buyers got back in and rocketed price back up to near the highs of the day. My gut tells me that one of these days we'll have a massive trend down day. But it sure hasn't paid to be short this market much in the last 5 months. Jeesh.