Today was an important day with the pre-market release of the employment numbers … the report was a bit of a dud and it was quickly blamed on the weather. The market took it in stride and all things pointed to the market being in a relatively positive mood for the day. (read my pre-market blog).
My plan was to play for long scalps off of support areas and to not chase the SPY if it made new highs. I didn’t think that there was enough “news” to provide the fuel for a real “gap & go” scenario so the high percentage trade was to sell resistance and buy support.
Let’s do this …
Before I get into Trade #1, I wanted to talk about a couple of trades that aggressive traders may have made … I give you these only as an educational tool so going forward if you see similar trade set-ups, you will recognize them and eventually may even decide to trade them.
You can see on the 1-min chart that I have posted on the next page the early action in the SPY. Aggressive traders will often take a couple of trades here that I will describe for you. They do it because experience has shown them they have a positive “EV” (expectation value) … that is the % success rate x average profit $ > % failure rate x average loss $.
Aggressive Trade #1:
On the open, price was $0.05 above the close from yesterday and $0.06 above the low end of our pre-market trading range (black dash line) and $0.08 above the 20 EMA support line and our $130.75 resistance line … in other words A TON OF SUPPORT!
Aggressive traders see that and will place limit orders at this level hoping to get a quick flash fill at the open. Their target would have been the $131.00 round number ad their stop loss would have been probably $130.70-$130.65 … a pretty nice risk/reward for those with the cajones.
That trade worked to perfection.
Aggressive Trade #2:
The second aggressive trade would have been for those traders that were willing to short the first area of resistance. I don’t have this as an “ideal” trade since there was a good chance that price was going to at the minimum push through the round number and possibly go to the high of the pre-market trading range approximately $131.25 or even higher.
Aggressive traders would have had a limit order for around the $131.00 level with a stop at probably $131.10 and a target for the LOD $130.75ish. Again, that trade worked to perfection.
Trade #1:
Again, my pre-market thoughts were to buy support … well here it was. Price pushed down hard and the 9:45am candle bounced off of the 50 EMA, the 200 SMA and the $130.44 pivot price. All of this was just above our $130.40 major support price. The 9:45 am candle made a hammer and traders should have gone long on the break of its high ($130.60). The stop was $130.38 – $0.05 below the candle low and just below the support price of $130.40. The target was $131.00 for about a 2:1 risk/reward ratio set-up.
Now if this set-up was any other time than in the first 15-30 minutes I would have said conservative traders not take the first signal (i.e., the hammer high at 9:45 am). This is because the two candles prior to the hammer were pretty strong bearish candles. Trading in the first ½ hour is expected to be more whippy so stepping in here in the face of big bearish candles is ok. If this happened at say 2:30 pm, I would say wait for a second signal candle.
Traders saw a strong push off the hammer’s highs into $130.95 (just in front of our target) and then the 10:05 am candle made a spinning top and our exit was to sell on the break of its low at $130.83 which happened the next candle.
Trade #2:
Some traders may have thought that the second trade was the shorting of that 10:05 am candle … and that would have been ok for aggressive accounts. To me it was similar to the Aggressive Trade #2 in that I was leaning for the day to be more positively biased at least for the first part of the day until it was proven otherwise.
The second “ideal” trade to me was going long on the break of the high of the hammer candle at 10:15 am ($130.76). Stop at $130.60 and a target of $131.00. This trade fit into my thinking that the market was positively biased … the market bounced hard off of the $130.40 area shot up to near the highs and then did a little pull-back, formed and hammer and then …. Higher based on the odds!
Two candles later we hit our target and the next candle at 10:30 am was another inside “spinning top”. The break of that candle’s low was your exit $130.84. You total profit was not great, and that is why in a potential Range Day, you should be selling at your targets, and then ASK QUESTIONS LATER.
Trade #3:
Again, we were expecting to sell resistance and buy support so Trade #3 was triggered at the same time we exited Trade #2. Our stop was $131.05 and the target was the LOD.
To me this was a more legitimate short than the exit of Trade #1. The 10:25 am candle actually pushed into our resistance area and was slapped down. It had a fairly large upper leg as a result, and then the inside spinning top candle, was enough for traders expecting resistance to hold.
Price pushed hard again but this time price sliced through the LOD and the $130.40 support line … Possible Trend Day??
So what does a trader do when his expected support gets sliced through? Well you scramble to look for logical support areas … I posted a chart that showed $130.20 as a 30-min 50 EMA possible support and the $129.57 low from a couple of days ago.
Price actually found support right around $130.25 which if you “looked to your left” you would have seen that this was the support area for the SPY during its big consolidation area from yesterday between 12 noon and 2 pm.
Price whipped around and the break of the 11:05 bullish engulfing candle’s high ($130.50) was your exit. Aggressive traders may have decided to try a long scalp here but again, the power of the break of the $130.40 level should have caused conservative traders to think possible Trend Day. For them, the next trade was to wait for the bounce and then short again.
Trade #4:
I started posting charts on the blog looking for possible areas for the bounce to end … my first had $130.62ish as the logical 50% bounce target, which also happened to be the price of the 20/50 EMA’s. The 61.8% retracement was at $130.72
Price worked its way up to touch the $130.75 resistance line and then formed a “fattish” shooting star at 11:35 am. Some would argue that this wasn’t an ideal shooting star but it was happening right at expected resistance so I think that it was good to go. Traders should have shorted on the break of that candle’s low $130.66. The stop was $0.10 above the candle’s high … therefore at $130.85. Your target was $130.40 and then the LOD.
In yesterday’s report I talked about how these trades have failed repeatedly over the past several months (POMO). I encouraged readers to draw retracement levels to monitor the move off of the pivot mark.
The chart on the next page shows these retracement levels … as you can see the 12:10 pm candle bounced off of the 200 SMA and formed a spinning top. The price had not even made it down to the 50% retracement level before the spinning top. The break of the top’s high two candles later ($130.65) was your exit. Again, don’t give this trade any more room … we know that the POMO loves to break these set-ups and save the market/day so be quick once you get evidence that the fix was in again.
Trade #5:
The same signal which was your exit on Trade #4 was your signal to flip and go long. So you should have been long at $130.69 with a stop below the low of the spinning top ($130.50) and a first target of the HOD and possibly higher if this was going to turn out to be a real “reversal” trade.
On reversal trades you want to hold on as long as possible … some traders will still be in scalping mode and want to sell peaks in momentum and reload on pull-backs. It all depends on your nature. If you wanted to sell before reloading on this reversal trade, then the break of the shooting star’s low at 1:20 pm ($130.91) was your spot.
I want to pause here to do a little Elliott Wave Theory teaching, as it helps with several things on this and the next trade. On the next page, I have the 5-min chart re-drawn. Note a couple of things … I drew in the corrective move from Thursday’s close (black arrows “ABC”) and then the 5-wave trending move off of today’s lows (green arrows).
What I am trying to point out by drawing these arrows is that patterns repeat themselves. According to EWT, corrective waves are typically ABC and trend moves contain 5-waves. When you realize this you can start anticipating moves and planing trades.
My eSignal software actually predicts waves on the fly and labels them as they are forming … now that causes many errors and redrawing but it greatly helps me in trying to stay one step ahead of the market.
Here is the chart I posted at 1:55 pm
See how the eSignal software drew my waves? It had the 3rd wave done on the shooting star candle at 1:20 pm and warned me to expect a wave 4 pull-back.
Now without going more into EWT than necessary, suffice to say that a core principle is that wave 4 has to be different in form than wave 2. When you look at wave 2, you notice that it was a plain straight bull-flag structure … so therefore we should have expected a little more motion with the wave 4.
Notwithstanding this knowledge, as a Ninja level 9 trader, I must look to see what could happen if the 5th wave push to a new high fails. That is why I was looking at the pushing against $131.00 to see if it was going to fail.
To me, a failure is “real” when you actually get a push through the critical level ($131.00 in this case) and then a “rejection. Here today we never really had that. Price just grinded sideways before it moved down and bounced off of the 50 EMA at 2:40 pm and made a hammer candle setting up the final trade of the day
Trade #6:
The break of the 2:40 pm hammer’s high at $130.87 was your trigger for the expected wave 5 push. Your target was the rainbow MOB target shown on my earlier in the day postings ($131.13 – $131.22). Your stop would have been below the $130.75 support line.
Price pushed right into our MOB target and we should have sold our Trade #5/6 holdings into the closing few bars.
Higher Time Frames:
SPY – 15-Min Chart
Are we topping, or did we just break an inverted H&S? We will see on Monday.
SPY – 30-Min Chart
The 30-minute chart shows a potential ascending wedge which is a classic ending pattern. Notice how it has run out of time … Monday is the day to answer a lot of questions.
SPY – Daily Chart
What a Ramp Job!! On the other hand, all the talking heads say now is a great time to buy equities. I’m sure they are right!
Cheers, have a great weekend … Leaf_West Visit me at my blog
