Using structure from yesterday to trade today

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.