Hey guys … I'm not sure if any one here on Tim's site wants a recap of the trade set-ups in the SPY for Monday … if not just move along. I just noticed the "hating" going on in the comments for my AAPL Friday trading analysis. I guess Tim's site is the wrong location for educational posts on intra-day trading … therefore this will be my last one.
The SPY action today pretty much stuck to the script that we have been expecting. For those who aren't up to speed, go back and read my blogs comparing the current action to April and read the portion of this week's newsletter that deals with the potential topping patterns (making an ABC as part of the second leg higher).
Here we go …
SPY Trading Summary:
Trade #1:
Again, having drawn in the pre-market support/resistance lines, traders should have been ready for support on the SPY at the $128.25 level. The SPY opened at $128.285, touched $128.26 and then closed the first candle near its high.
Couple points to make here … I will often take the trade on a trigger of breaking either the high or low of the first 5-min candle. I use a bit of objectivity however. I will wait for a second signal if say the high of the first candle is right into an area of confluence like the 20/50 EMA's or an expected horizontal resistance/support line.
As well, if the candle extreme puts me right in middle between two support/resistance lines, I will pass on the entry … instead I will wait to see if I can enter on a pull-back that is closer to the lower support line. This way I have more profit potential and less risk in terms of the size of the stop.
I'm saying all of this because I passed on entering on the break of the first candle's high. If you are more aggressive, entry would have been fine. Your entry would have been on the break of $128.47 with a stop below the candle low ($128.26) … probably below the support line at say $128.20. Your target would have been a test of at least $128.70, the next expected resistance. $0.23 of profit potential vs. $0.27 of potential loss … not a great risk/reward.
The traders long on the break of the first candle's high would still have been in the trade as the SPY moved up to the pivot price of $128.59 (green dashed line) and then pulled back to test the LOD.
The 10 am eastern candle formed a long-legged hammer with its low at $128.27 – $0.01 above the LOD and just above our expected support area. Now I can't stress enough that you need to have these levels in mind and be prepared to go long as the SPY comes into this area to test the LOD. Be prepared to go long on a successful retest. If this test is successful, the odds of making it back to the HOD or even higher are generally pretty high so it is very profitable to get long here on this type of a retest if it is successful.
Trade #1B was going long on the break of the high of the 10am hammer – $128.39. Your stop would have been below the expected support line … $128.20 (same as in Trade #1A), and your target would be at least a retest of the HOD and most likely higher. That is because when the market gives you a successful retest of a support area, you will attract more buyers and less sellers … this will give the SPY more power and usually allow it to push through the early morning HOD.
So …. compare 1A and 1B … both trades are trying to accomplish the same things …. get long the SPY as nearby support levels seemed to suggest that it could move higher first thing this morning. Do you see the difference though? Trade 1A was more aggressive … with more risk you get more reward sometimes. If the SPY failed to pull-back, the aggressive trader would have been long from the high of the first candle and the more conservative trader (the one waiting for 1B) would have had to enter a SPY long at a probably higher price later in the morning.
On the other hand, by waiting the more conservative trader actually got his fill at a lower price by waiting for a retest of expected support … he was able to buy with more evidence that support would hold, he was able to have a tighter stop (less risk) and he was probably more confident that the next resistance area would most likely be hit. In reality, there was only $0.08 difference between entry prices, but in my eyes Trade 1B offered considerably more edge.
Some days, waiting for 1B will not work, but today it did.
Your exit for Trade 1A/1B was the same. As price was trending strongly, you should start to draw trend lines and not even think about selling your SPY until the trend line at least breaks for the first time. The 12:20pm eastern candle broke the trend line … you should have been prepared for that, as the 12:05pm candle was kind of a large shooting star – it had a large upper leg and a smallish real body near the lower part of the candle.
Having a candle like this right near the 12pm lunch hour again is a classic "end of trend" warning. You should try to hang on though for at least the break of the trend line which was $129.05. The shooting star low was $129.01 and you could have used that as your trigger as well.
A more aggressive trader could have held on to see what kind of a retest of the HOD we were going to have after the first real break of the trend line. Price did bounce to test the HOD, but the shooting star candle at 12:45pm was your trigger to exit. Its high, made a lower high ($129.11 vs $129.16) and the low (your trigger) was $129.04.
Trade #2:
I haven't mentioned it yet, but all trading day long you need to be checking your various internal indicators as you monitor your positions. I am a religious follower of the NYSE TICK indicator. This indicator measures the number of NYSE traded stocks that trade on either the bid-side or the offer-side of the market. When people are aggressively chasing the market the TICK number will sky rocket north of 1000 … and on the opposite, when people are selling like crazy, the TICK will be <-1000. I mention this here because I noted during the lunch period to myself how consistently strong the TICKs had been. When TICKs spend a long period of time on one side of the "zero" line then you have to respect that side of the trade.
Again, seeing the TICKs being so consistently strong on the move higher, should give traders of the SPY confidence to buy the SPY on any pullback into the 20 EMA, which was actually Trade #2.
The SPY pulled into the 20 EMA and traders should have been expecting it … I infact posted a blog showing that I was waiting with baited breath … here is the picture from that blog.
I was confident in my expectations that the SPY was just doing a consolidation/correctional move into support. I drew a ABC extension on the SPY to come up with my $128.94 target … that was right in the expected confluence area of the 20ema ($128.96) and the pivot price (green dashed line at $128.95). I then put in a limit order at $128.94 and waited. I will use a $0.15 stop loss limit on these types of trade set-ups. If $0.15 is not large enough then my read of the market is way off and I should reassess.
So the SPY actually hit $128.93 and then moved higher. The 1pm eastern candle that bounced here was actually a nice doji and conservative traders not wanting to preset a limit order a head of time, should have been prepared to buy the break of the high of this doji at $128.98. Being prepared and more aggressive netted you $0.04 more in potential profit here.
My potential target here was drawn using my MOB software off of the 12:05 pm candle … I posted the picture in a blog posting and showed the target of $129.30-$129.40.
Your exit was at the same point for the first short entry … the break of trend line support at 2:45pm at a price of about $129.07.
Trade #3:
Trade#3 was to get short on either the break of the trend line support at 2:45 pm or if you were more conservative, on the break of the 50ema and pivot price (say $128.95ish) just after 3pm.
You should have been prepared to take profits on Trade#2 and to possibly get short with Trade#3 when the 2:15pm candle was put in. Here you had a huge shooting star candle push to a new HOD and then close below the line of resistance at $129.20 amd the HOD from today and from yesterday ($129.17). I don't short these shooting star candles here as it is a test of a higher price area … there is no reason yet to believe that it can't test the area again and the next time be successful.
However, in this instance, SPY did not try to reach new highs again, and the trend line was broken (along with the 20EMA at the same time) and then the "line in the sand", the 50EMA was broken.
A prepared trader could have gone short here with a stop above the $129.20 resistance line. The target would have been the next support line $128.70.
Price moved down putting in two 5-min candles with the same low at $128.76 right near that magic 3:30pm time. As most of you know, I hate to take day trades into the last 1/2 hour so a cover of your short any time here was ok by me.
You should have had your stop at least equal to the 50ema here and therefore would have been stopped out at least at 3:35 pm.
Conclusion:
Not a huge day for SPY traders, but if you are prepared going into the day with your resistance/support areas and you have a sense from higher time frames what to expect, then these types of days are low stress and can add nicely to your bankroll.
Cheers … Leaf_West
This analysis is typical of what I do on my blog … Visit me at my blog
