Trade Plan for 10/4

And a Free Lesson on Internal Broadening Formations/Megaphones

The weekly post should be reviewed prior to this. Link to The Week Ahead

Since nothing really changed from yesterday on SPY 0.00%↑ I’ll take an opportunity to explain the selloff (from my perspective) between 12:30 and 1pm EST.

We can see that we have roughly been trading between 5730 and 5770 give or take (26-72 works) since the Tuesday AM sell off through today with the exception of Tuesday’s “afternoon rally high.”

The overnight low was 26.5 and price rallied into and at the open tagging 5770 high of day and then sold aggressively. The yellow arrows point to the overnight low and high of day and the blue arrow points to the open. Below that we will drill in.

After the sell price begins to make a series of very slight lower lowers and HIGHER highs (a broadening formation or megaphone) but internal to the overnight low and RTH high. We then get a POOR low (if unfamiliar see the free blog on PharmDCapital.Com) at our key 5733.5 spot. The lows were equal to the tick. This (generally) represents an incomplete directional move often due to (in this case seller) exhaustion. Price then rallies and begins to make a series of slight (internal) higher highs. This takes the stops of the secondary sellers that had been selling 55-57 AFTER the 70 seller had presented.

When a broadening formation exists intraday, and a new high/low is made, we must monitor for exhaustion of THAT directional move to potentially trigger a reversal. Price doesn’t NEED to make it all the way to the lines you have drawn on your chart. We also don’t immediately Fade the move.

Trading the reversal isn’t as simple as randomly (in this case) shorting a level from your plan for the day. In this case we saw that the pace/tempo of buying had slowed significantly. We still can’t randomly short it as we can (and did for a bit) chop and grind slowly higher. However, we can have our guard up for a sudden flip where selling turns on to drive the reversal. This then triggers the stops of the late buyers and if sellers press can continue to do so all the way down. The following was posted at 12:15 EST. The reversal started right at 12:30 (not uncommon to do so on a 30 minute period change). This can be used to initiate a short, or often just to take profit on longs to avoid the rug pull. To take this short you have to identify the change in the tape and find your entry. It is a fully reactive trade. It is worth watching a replay of the action to potentially identify this for yourself the next time.

In the end we remain in a box ahead of FOMC. If you’ve followed long enough you know the trades.