SPY Review (by Leaf West)

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Calgary_01 A reader at my blog site asked me to do a review of the trading in the SPY ETF for today … I do these quite frequently, so I encourage readers here on Slope who struggle with intraday trading to spend some time at my site to help them in their battles with Mr. Market:

Today ended up being a Trend Day … once you recognize it as being a Trend Day the trading strategy is pretty simple.

  1. Short all retracement moves into the 20 ema;
  2. Then expect a retest of LOD's and probably a new low;
  3. Then cover the short on a reversal signal/candle;
  4. Then wait for retracement into the 20ema;
  5. and then … rinse repeat.

It's really as simple as that … place your stop above the 50ema and keep assuming that the TREND DAY will continue until it proves to you that it is not going to.

Turn off all your indicators … only two things PRICE and MOVING AVERAGES matter.  Ignore MACD's, RSI's etc.  The only indicator that serves some purpose is the TICK indicator … pay attention to this to confirm the pushes to new LOD's.  If the TICK does not make a new LOD when price does, be a little more careful on the next retracement into the 20ema.  The pullback may be a little more complex (i.e., 2-legs) or it might even push through the 20ema by a little bit.

When do you know it is a potential TREND DAY?  I use a pretty simple method.  If after the first couple of 5-min candles, the market pushes in one direction strongly and breaks resistance prices, your antenna should be going up.  After the first hour (10:30am eastern), if the market really hasn't had any push in the opposite direction, you can start to assume it is unfolding as a TREND DAY and put on your TREND HAT.  Until the 50ema is broken, keep implementing your TREND Day tactics.

Having this as background, let's dive into the trades:

SPY_Jan19, 2011_Trade Day

Trade #1:

I had posted pre-market the support/resistance lines for the SPY.  $129.33 was drawn as support based on it being the HOD from Friday.  I often if focused and ready, will trade a stock/etf in the direction of a break in its first 5-min candle.  Therefore, I think shorting the SPY on a break $129.36 would have been ok.  To be even more conservative, you could have waited for the break of the horizontal support line $129.33.

The stop would have been above the HOD $129.50.  The target would have been the next obvious support price $129.00, which was also right at the 200sma.  Yest's LOD $129.03 was also right in this confluence area.

The 9:55am candle came right down and bounced hard off the support area … when the next candle formed a doji (classic reversal candles) and didn't even push below the previous day's low, that was a sign to cover your short and then wait to see what would happen

An aggressive trader could have tried a long scalp, but that is risky since the market had shown no real strength yet, and any bounce could have been very small.

Trade #2:

The second trade was triggered when the trend support line was broken … note that the pivot price (green dash line) of $129.15 was showing that the SPY was having difficulty bouncing higher …. that should have warned you for a possible break lower.

Again a conservative trader could have waited for the break of the $129.00 support line.  your stop could have been above the high of the 10:05 am candle – $129.21 … say $129.30 which is roughly the 20ema.  Once you have pushed to a new LOD, you can trail your stop while you look for a reversal signal to cover.  I like to go $0.03 – $0.05 above the 2nd last candle and keep adjusting every 5-min.

So the market pushed hard through the $129 price level and the 200 SMA … it was now 10:30am and your TREND DAY hat should have gone on!!

Price then broke the $128.79 pivot price (green dashed line) before stabilizing a bit … keep moving your stop.  As well, when you get around an obvious level of support/resistance (like the pivot price) watch how the etf/stock trades around it.  Does it want to get above?  Is it staying below and having difficulty?  This will give you a hint as what to expect so you can get ready.

Price pushed to a new low at 11:10am and then put in a quasi-hammer candle, which you could have taken as your exit.  Supporting you decision on the cover spot was the MACD crossing over the signal line.

Again, don't get sucked into going long on a potential TREND DAY when an indicator like MACD tells you …. Ignore that part of the signal.  Just be patient and wait for the retracement into the 20ema, which happened soon enough.

Trade #3:

Same strategy … break of the trend line at 11:55 am.  Confluence here of the 20ema and the pivot price should have given you more confidence on the trade.  Again, your stop should have been say $0.10 above the pivot price … stop at $128.90 say.

Bullish engulfing candle at 12:50pm should have been your exit … note that the TICK did not make a new LOD at the new low price … as I mentioned, no problem, but it should have made you a little more careful in waiting for the pullback into the 20ema.

Trade #4:

So the 12:25 pm candle sliced through the 20ema and the TICK made a new high … again not a TREND killer but I would stand back and make sure of your short signal.  I will usually require 2 signals now that the 20ema was broken and TICK made a new high.

The first signal was the shooting star-like candle at 1;35 pm and the subsequent break of the trend line.  The second was the break and close below the 20ema.  So, getting short on the break of the 1:50pm candle was the right strategy at the low of that candle … $128.46.

Your stop should go just above the 50ema now at say $128.72.  If this stop is too big, then bring it down to the trailing 2nd last candle.  The more room you give it the less likely you will get stopped prematurely.  That is important on TREND DAYS!!

Follow your stop down … on most TREND DAYS people will cover/square their positions going into the last 30-40 minutes, so you should be prepared to cover on the first real signal.  That came on the bullish engulfing candle at 3:15 pm.

I avoid the last 1/2 hour of chop so your day would most likely be over … enjoy your TREND DAY, as they are the most profitable days if you learn to trade them based on my simple rules.

Cheers … Leaf_West

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NOTE FROM TIM: I am way too busy taking this all-to-rare opportunity for bears to make money in the markets, so I'll be quiet until the close.