Always Look to Your Left (by Leaf West)

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VS Bruins_Jan3_01I blogged on my site pre-market on January 4th about how the early action in the SPY etf was inside the range of the last swing high and low from the prior day.  That observation brings about an important point that I think many investors /traders miss … that is they don't establish the expected initial trading range for which ever stock they are watching.


By that I mean you can learn a great deal by looking at the pre-market trading in your favorite stock and then LOOKING TO THE LEFT (i.e., looking at the trading from the prior day or even days) to see where the possible initial trading range could be.

My morning blog had a picture of the SPY … when I wrote the blog at 9:20am, the pre-market trading range for the SPY was between $127.07 and $127.26 … I LOOKED TO THE LEFT and saw that this price range was contained inside the last swing high/low from late yesterday.  Therefore, I drew horizontal lines at those swing high/ lows … $127.33 and $127.02.

SPY_Jan4,2011_5min_LookLeft

My blog on Jan 3rd mentioned that I thought the late action in the SPY looked like a bear-flag and I wrote that I expected some further weakness early this morning.  With that in mind I placed a limit order to short the SPY at $127.35, just above the expected initial range.  I often place my initial short trades with limit orders at prices I am hoping are at the top of any move … I do this as prices often tick at these target prices so quickly that it would be impossible to get a fill manually.  I make these initial orders small so I can withstand some heat if I am wrong about the price level.

So the market opened and the SPY's first 1-min bar poked through the $127.33 line and hit $127.37.  Just as quickly, the SPY etf  turned lower.  I was filled at 35c and happy as the quick move back down showed me that higher prices were rejected by the market.  If prices can stay under that $127.33 level, you can get more aggressive when shorting going forward.  That didn't happen today though as within three 5-min bars, the SPY had broken the lower end of my estimated initial price range – $127.02.

Much like I thought it would, the SPY was showing early weakness and I therefore added to my short when the 1-min stochastic became overbought again at around 10:25am eastern.  This first real bounce in the SPY couldn't even get the etf back to the 20ema on the 5-min chart … a sign of real weakness and pretty good confirmation to expect lower prices.

I'll finish this blog here as the real point of it was to talk about getting ready for the trading day by making a plan …. a big part of getting a plan in place is to look at the previous day's action for any hints of what might be the early trading direction.  An even bigger part of the planning process is to examine the current day's pre-market trading and then LOOK TO YOUR LEFT, to see if you can establish prices which may contain the early trading.

Having levels picked out will give you confidence to short or buy if these levels act as resistance/support.  Also, if price breaks these levels and the market "accepts" the new prices, you will be prepared to act either long or short.

Cheers … Leaf West

http://blog.tradingwithleafwest.com/

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