I just posted a video with my plan for next week. You can watch that here and I recommend as it will help you further understand this post.
I was saying that there are 71% odds of a gap up so was basically saying that I wanted to use Thursday’s low as a major inflection point. I don’t like hard stops because of the Algos but rather a place I don’t want to start seeing higher lows and higher highs take place against a short position. This takes discipline.
I look for places that should be resistance, and when I see them turn into support, at the very least I get flat, and sometimes reverse my position. That came with a ton of experience and chart watching and completely brain washing myself to realize my opinion doesn’t matter. I say it here often as not only a reminder to my followers, but to myself as well.
The old me from years past, would come into this week completely sure we are crashing. Not have a good plan in case the un-expected happened, only to get stopped out at the top of a nasty short squeeze. However, no more. The new me knows when to cut and run because, I plan plan plan plan plan and then execute. It’s a cliche maybe, but I am doing my best to articulate here through blog posts and videos what that means.
If you check out the video, I talk a ton about Thursday’s low being the neckline to a H&S pattern that many are likely playing.
What will happen if we gap up and start to move north of that line is it will squeeze the late shorts.
I think the chart of JetBlue articulates this well. H&S support is a battle ground, not to be taken lightly. You want to be very careful shorting in the hole because you will get squeezed tons. Usually in fact, it is a gap down that ultimately takes out such a contested level and then it moves fast.
It moves fast because all the Bulls who bought get stopped out on a gap down and then it can accelerate quickly. However, we can not be blind to a range like trade here between 2040 and 2080 as we work through this 3rd week of May. If you are one of those late shorts, you want to be very careful on a move back above Thursday’s lows.
Yes, I think we ultimately go lower as the price action has not given me reason to think otherwise YET but I still want to short strength, not chase weakness, particularly right at support. Why, because what if I am ultimately wrong? I get my face ripped off.
I want to do my best to short on the close most days, particularly on strength, but it doesn’t mean we just go lower here. Without a gap, we can expect that the market has to wear out the dip buyers first and that can take several more volatile days.
That means I will be stingy while we are still in this range and if support levels are regained and can’t resist, I will get out, and wait for a place to short higher.
I hope I am getting my point across. Never go in thinking you “know what will happen”. Plan for many realistic scenarios and decide what you want to do there.
This is why I mainly trade 2 patterns: H&S and inverse H&S. Because I have mastered them and they offer me an edge because I know exactly what to do when things happen or don’t happen. That is my edge in the market.
Another example of this was a chart I posted Friday. All last week we were talking about the potential inverse H&S in the right shoulder. Below we are looking at OMER, which is some biotech stock that the emotional traders told me on stocktwits before earnings was going to the moon.
Of course for me, I was just posting a very neutral chart saying, hey, this chart is telling us it’s make or break for this stock. I don’t even know or care what the earnings were last week on OMER. Did the market like them? Sure doesn’t appear that way as we are back down at H&S support and below that, this stock gets smoked.
I bring this up for two reasons.
1) to articulate that noting matters but the price action
2) To show you why I was confident trying to sell strength this week.
Because I have seen inverse H&S in the right shoulder before. They usually fail and the larger more dominant pattern wins. So we try to sell pops like Tuesday until the inverse H&S breaks out, which it did not.
This gives us the best risk/reward, and if we are wrong, no problem, we get out for a small loss and flip long for a big short squeeze higher.
It is usful to constantly study H&S patterns and master them to understand how they trade so you too can master them.
This kind of work, will ultimately give you and EDGE in the market.