A classic intraday trade example

Today I figured I would tell the story of a weakening market with photos instead of video. So while CNBC and their cohorts were lauding the strong market all day they were caught by surprise by the strong late day reversal. I will say I missed this trade because I had to leave the trading desk during this setup at 3:00 PM EST but it played out as I had a notion it would.

During the strong upward phase of the morning move in all the major indexes the higher beta ones such as the Semis (SMH) - Nasdaq (QQQQ/NQ) - Russell 2000 (IWM/ER2) were moving powerfully upward and leading the way higher by outpacing the lower beta SP500 and Dow 30. But as this was happening the Accumulation/Distribution indicator that I apply to the SPY (SP-500 ETF) continued to make lower highs and lows. I have come to rely on that indicator and chart as a pretty good indication of underlying strength and weakness in conjunction with my other forms of potential evidence.

As you can see Accumulation/ Distribution was having nothing to do with the strong advance up to the lunch time period. I was noting this thinking I might be able to look for a large topping pattern to look for a possible short in the afternoon for a longer term hold versus a short term scalp. Just something to keep in mind because remember these trade entries require a weight of evidence on my side.

The next thing that I noted was that the high beta stuff (SMH- NAZ) was starting to lag as the Dow went to new highs at about 2:50 EST.

SMH

(arrow noted the point before waterfall drop)

Naz Futures

(many were noting the inverse head and shoulders as a sign we were going back to high of day)

Dow Futures (YM) Look at that high of day not confirmed by the previous charts.

So by having a heads up and a plan, a trader could have been ready for the 3:00 drop.

As a final clincher look how prior to the drop AMEX Tick busted a trend line on the 2:58-2:59 bars while having the ergodic indicator cross on that chart.

So while chasing the market in most instances is a poor strategy there are times when having a bias based on a weight of evidence can lead to very strong entries that can give a level of confidence in scaling into a position as long as the conditions your noting remain the same.

If you are trying to use discretion such as this analysis in your trading I can pass along some pointers unrelated to your analysis and trade parameters that I find critical in my trading.

1) Sit back in your chair (keep your nose off your screen)

2) Relax your shoulders

3) Be aware of your breathing pattern - slow and even

4) Allow the chart to “give” you the trades

5) Keep playing out scenarios and how you might react - act when one plays out

I will try to get some more videos up this week. I just hate having to take a mediocre trade for the sake of the video. So if I see some interesting setups I’ll try to pass them along.

Also guys, give John some feedback on the previous post. What do you think he is using as an entry criteria? Something simple….. Yet seems to have quite remarkable performance with very little market exposure. And….It worked in the bear market.  (Damian got the exit

Have a Great Night!
Dave Johnson