Thursday May 19, 2016
This is my opinion, and to be used for Informational purposes only. None of this is a recommendation to buy or sell anything. Due your own due diligence, this is mine, I am only sharing! Not fact, opinion.
Key Developments :
- S&P 500 Closes below neckline
- DJIA, Russell 2k and SP-500 all closed below H&S Neckline (NASDAQ still holding)
- OPEX tomorrow, tends to be volatile
Checkmate? Let’s hope so. Despite an afternoon rally back to the neckline, the S&P closed below the H&S topping pattern for the first time. The bears now need to now show some follow through below today’s low to give the pattern 100% confirmation. That being said tomorrow is May OPEX and as we have been saying all week, they want to hold it up to expire the puts worthless. Conspiracy theory or not, there are market dynamics that contain price during opex, we won’t discuss that in tonight’s article but there are.
The maximum pain for opex is 205, so the market makers make the most money the closer to that number we are. I don’t use it as a major driver in my trading but is interesting to note.
Here is a look at the S&P 500. If you were following me on Twitter during the big move lower this morning, I put out this chart, basically saying look, we hit the 161.8 fib swing target, be on alert for a bounce to retest the neckline.
And here is what it looked like from that point on. We spent the rest of the morning creating a small reversal pattern, which interestingly enough did not acquire it’s target. Came about 20 cents short. Potential sign of weakness as there was ample time for it to do so…but we’ll have to see tomorrow.
So that rally leaves us exactly where I expected when I posted my tweet. A throwback to the neckline. So now the bears job is to hold it down, while the bulls want to keep the little rally in tack, fill today’s gap and make that neckline support again to create a massive bear trap. I am not betting on that outcome, but we must never let our guard down and constantly be looking to fade strength while this topping pattern is in place, rather than shorting in the hole. Identify a pattern and try to trade in it’s direction by picking spots where pops might end with low risk entry. I will articulate further as I discuss how I traded this today as it helps me to get my thoughts on paper, and I know you guys/gals enjoy listening :).
This chart shows we are below the neckline and to this point looks only like a throwback.
Now a few were talking about how I traded it today. I covered pre-market near support, shorted into the morning rally (took a little pain) and covered 2/3 down near 108 on the IWM as I have been shorting the Russel rather than the SPX for reasons outside of the realm of this post.
The 108 level, why did I take some off there?
1) It coincided with the 132.8 and the 161.8 fib from the last swing move. (basically yesterday)
2) It was also right there at that previous support level at 108.13
Under the surface it looked like this. I got out of 2/3 when that pop occurred below. Turned out to be a bit early, but these downward wedges are a red flag for a squeeze, as you can see it ultimately did what I expected. I am still holding the 1/3. Remember, I am trying very hard to go swing here because there is 5% of downside and I don’t want to take myself out of winning trades completely.
I didn’t like the way the Russel looked at all for the afternoon rally, so I decided to hold it and get long SPY against it. It was more or less a hedge.
It allowed me to take a low risk trade without getting out of my primary swing short thesis. Sort of hedging my swing trade with a day trade.
Here was a Tweet I posted this afternoon, at which point I was already long against the low of the down trend. We know how this turned out by now, we rallied to 2041. That being said, I got out a little early. See below
Here was my SPX exit. It looked like it wanted to fail so I got out of my long and flipped short into a right shoulder formation. Ended up taking a small loss ~1pt as it became clear the H&S was not going to happen there. Meanwhile still holding my 1/3 Russel short overnight as it’s still in the money, so we’ll take our chances the bears can hold it down in the AM.
At the end of the day, today was good trading in my mind. The action was readable unlike the last several days which have just been tug of war short squeezes. That is a tough environment because there is no logic to it, it’s purely just dip buyers at support overpowering late shorts. So make a note in your heads the next time you are stuck trading in a right shoulder. You always want to find spots into strength once you identify this pattern as shorting in the hole will rip your face off.
The Bottom Line:
The bears are oh so close to checkmate. They closed the S&P below the neckline, but can they keep the pressure on? They need to take out today’s lows with some conviction to confirm the pattern. Other than a very controlled, well defined H&S throwback, there is not much to work with for the bulls just yet. If they are going to save the day here and take us to all time highs, they are going to need to find a way to form a bullish reversal pattern rather quickly before the bears show their conviction to the downside. OPEX can be volatile so do your best to only trade the best setup and not try to force things that aren’t there. That is true everyday, but particularly in OPEX with the tug of war that is going on for control of the next swing move. See you tomorrow.
Chart of the Day:
RACE – picking tops and bottoms if for your ego, not your wallet!
Identifying the trend is one of the most import things we can do in trading and the use of patterns helps us do that. So many people are fascinated with picking tops and bottoms, which is a losers bet. I post things all the time and try to diagram the kind of price action I am looking for. I might set an alert at that level to re-evaluate. If I don’t get my setup, no trade, no big deal. However it is the constant hunt for the same setup that makes me successful. The H&S pattern is a trend changing pattern. It is the swing from @HigherLowz and Higher Highs (uptrend) to Lower Highs and Lower Lows (downtrend). We want to sell rips in a down trend and buy dips in an uptrend. Sounds simple right?
But what does that mean? Well let’s look at RACE. We have a H&S trend changing pattern with a downside target of 38.59 on a measured move perspective. Even if you missed the entry on RACE in the right shoulder, you could have gotten in on the throwback, or you can get in on the bearish flags, which are continuation patterns formed usually by short covering. One of the scans I like to look at are those for bull or bear flags. However, to give me confidence in the trade, I like to have my bread and butter pattern in the background much like I have here with RACE. So in this case I would watch this flag and try to short when it breaks down, with a stop above the flag high, knowing that I have the trend and the pattern in my favor.
The point and lesson here is, to make money, you don’t need to find the top or the bottom. If RACE were to grind into 41, you would still have $2 in the trade with a very high probability of completing to the target and low risk. I hope that sheds some light on things for those newer to trading. We want to bet with the trend, not against it. As I always say, picking tops and bottoms if for your ego, not your wallet.