Managing Bias Across Multiple Time Frames
4/11/2024 SPX Non-Paywalled
Today was a perfect example of one could get caught flipping bias all day and find themselves on the wrong side of the trade so I thought I would share my process for situations like this. When there is conflict across timeframes and trade setups, trading intraday can become difficult. Hopefully some of this post will prove helpful to you.
First the background for the day’s plan, and then my though process as it played out:
We have been trading in a large balance range that, coming into this week, was at least a 3-week balance (box). This was the SPY 0.00%↑ box I had posted about. Most profile traders were using ES 5194 as the bottom of this balance which is valid. After reviewing both SPX and SPY I was open to considering as low as 5181 as the bottom of the balance.
We were monitoring for a look below and fail of the balance low as a weekly swing long:
We were on watch again for this today to avoid being trapped short and to get long:
If you saw the futures action prior to data, it might have been easy to get bearish. It is important to avoid getting bearish as price goes down and bullish as price goes up. For me personally, I get bullish when price stops going down (specifically at a major area such as this) and I get bearish when price stops going higher.
After data was released (which frankly wasn’t that great when viewed in context) the look below and fail triggered, holding at demand, a key AVWAP, and just above 5172. Price ripped higher before the open, hitting 5222.5 as the overnight high (short of yesterday’s high).
After a 50 handle move in less than an hour, it is not unreasonable to expect a pullback unless there are so many trapped shorts that buying never shuts off. This was not the case as we were opening inside yesterday’s range. Additionally, (and surely major market participants) were monitoring for a look above and fail of yesterday’s key 5216 level.
ES opened at 5218.75, saw an immediate drive lower triggering the look above and fail short. Price then traded all the way down and through yesterday’s low into another long setup-both intraday and high time frame:
Here’s the chart again and then I’ll comment and add my thought process for such days:
Looking it over, one can see how easy it would have been to be bearish because of the overnight action prior to data, get bullish on the reaction to data, and then get bearish because of the first 45 minutes of price action nearly straight down.
Here’s my thought process in situations such as this:
First off as price is trending down premarket, I’m aware that it is simply coming into the bottom of the balance. If price is going down, I ask myself what could be bullish about it (the reverse is true). In this case we had the high time frame long setup.
Once the look below and fail plays out and price rips higher I ask myself: “What could invalidate this high time frame long setup and why should I be skeptical of it.”
In this case, price would need to get trapped below the open of the data candle (5179.5). This would represent a loss of balance using either method I had prepared for and clearly would be invalidating the move up on data. Additionally, there would be tremendous numbers of buyers since that candle underwater. Unless this occurs, the high time frame long is valid. I’ll even write this down or mark it on my chart. I can be somewhat skeptical of the move because it occurred outside of cash hours, and I can plan to be a bit concerned for the move if 5194 is lost.
So, I’m bullish for today, right? Unfortunately, the inability to open above yesterday’s high left overnight bulls at risk of a liquidation. So I want to be long at the open, but the open is a short. We had downgraded its rating premarket because of the look below and fail of the balance, but it was still a short. It wasn’t just a small pullback either. Once it got trapped under 5210 it was going to 5194 which would put the entire bull thesis at risk:
Here I am short, and the action looks quite bearish because price is going down. Yet I wanted to be long for the day.
Similar to the above, I’m always asking myself what would invalidate the intraday short setup. In this case I also remind myself of what would be required to invalidate the higher time frame long setup. Thus, my expectations on the short are tempered, and I am prepared to flip long.
In this case, the intraday long setup (look below and fail of 5185 yesterday’s low) would both (potentially) invalidate the intraday short setup and validate the higher time frame long setup.
So how can we manage this? In different situations I’ve managed this whole mess with a number of different options so I’ll list them out and you can see if any of them work for you.
Decide that the day is a long because of the high timeframe setup. Sit out on the short and wait for a proper long setup. If the high time frame long ends up invalidated, I simply miss the continuation short and say, “good game bears.”
Take the short with one trading vehicle (or strike), take profit on the way down, and then as the intraday long sets up, take a long with another vehicle (or strike). I’ll often take profits on a short but leave a runner in place as I navigate into a long. The reverse is true. Not all brokers will let you actually have a long and short ES position open. But there are plenty of other ways to do it. One could long the strongest index (NQ today) while holding an ES runner short. If one is trading puts intraday, one could also buy longer dated calls (since it is a higher timeframe swing long setup). There are also leveraged ETFs that can be used. There are numerous ways to do this. Once I have already profited from the short in this situation, flipping to a “hedged” position is fully reasonable. This way if the long setup ends up failing, I can hold the runner short. If the long works I can take a trailing stop out on the short and it was still a green trade.
Take the short and get flat when the potential long sets up. I might miss the long, or I might get a second chance at it. But either way I’ve paid the bills for the day.
Making a decision how you will handle these situations ahead of time, and outlining what would validate or invalidate a move can help avoid ending up on the wrong side of the trade. I’m sure a number of traders were bullish at the open and took multiple stops on longs, ultimately missing the move. Similarly, I’m sure a number of traders were bearish after the opening selloff and continued to try to short intraday lower highs all, giving back gains from the early short.
Hopefully my thought process is helpful, and you can use it to think through and/or adjust your own process when dealing with conflict across time frames.
NOTE:
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