Trade Plan for 12/16

A Couple of A/A+ Setups have Entered the Chat.

Be sure you have read the Trading Doggy Style Starter Kit. I will be adding to this over time, likely first focusing on example executions. Trading Doggy Style Starter Kit. A recent update has been made with some additional content.

The weekly post for SPY 0.00%↑ and QQQ 0.00%↑ should be reviewed prior to this. Link to The Week Ahead

Thursday was a rather bearish session which ended on a spike down (on ES), which put sellers at risk if they did not sustain below that spike. You can read what a spike is in the starter kit linked above.

After hours AVGO 0.00%↑ reported earnings which were received quite well and futures (particularly NQ) gapped up quite a bit at the 6pm open and never meaningfully looked back. The bond market, however, was a disaster. In an equity bull market, the day-to-day movement of bonds is generally of little concern. However, large moves and especially major technical breaks aren’t ignored for long. This had us cautious into the open.

NQ opened on a true gap up, saw an initial drive higher taking ES with it, and then both sold off quite hard. See the starter kit for an explanation of True gaps and how to trade them

ES drove to and through Thursday’s low and into the bottom of our recent (now 10 day) trading range. The bottom of a range/box is a natural spot to cover shorts and look for longs. The opposite is of course true at the top of a box. Indeed, responsive buying was seen (both short covers and new longs) and range did not break. However, buyers were unable to fill the open single prints (also explained in the starter kit) which is a sign of weakness on their part. We closed the day in the bottom portion of the range and the last hour of futures trading took price back to the bottom of the range.

The nice thing about Friday’s profile and the close is that it leaves us with some juicy trade setups for Monday.

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Levels - Note not all weekly levels will be used each day but they could all present as part of an “active sequence” within a given day(s). Focus on the bold levels in general and certainly on high time frames

ES Levels to add to weekly levels

6084.75 Friday’s excess high

6075.75 Friday’s excess above

6072-6073.25

6066.75 Friday’s B period singles sit above here

6060-6062.75 major pivot for Monday

6026

NQ Levels to add to the weekly levels

21790-21798

21741-21747 includes Thursday’s high

21718-21724

21699

COMMENTARY:

ES is more straightforward so we’ll start there.

Holding below 6060-6062.75 (or a look above and fail) is a short first targeting 44-47.5 with a decent chance for a continuation break through the bottom of the box. Because of the possibility of a downside break and a significant return for runners I will rate this setup an A/A-.

If/once the above happens we have to have our eyes open for a potential long setup. If one is already short and short biased, consider at least “hedging the edge” if the below long setup plays out.

If/once through 6035 was covered in the weekly plan. We need to be open to the possibility that this gives us a 70 handle move to the downside. If not for bullish higher time frames and supportive flows, it would be a near certainty. As it is, we still may need to consider longs VERY selectively, but safer longs will be back over 6047.5 for Monday.

A look below and fail of 6039.75 (ideally holding 6035) is a long. Trading back through 6044-6047.5 from below could be tricky so I am cautious until that reclaims. This aspect slightly downgrades the setup. However, given the broader trend is so bullish and this is the type of trap of sellers that could generate and upside break of the box, I will rate this an A/A+. So if entering below 6044-6047.5 I would be saying “keep it tight” at first. Buyers will need to press through 6060-6062.75 so that is a natural take profit spot.

An alternative way to trade this, or if you simply miss the entry, is to wait until there is a pullback (maybe off 6060-6062.75) that holds 6044-6047.5 and enter there with a stop at NLOD. This is a higher probability entry with slightly lower reward to risk (R). This still an A/A+ setup however. The pressure would be on sellers to make new low of day and the potential upside is again an upside box break for runners to run into price discovery.

If we trade higher first and reclaim 6060-6062.75 the setups are far less clean. There are spot that sellers can defend and take it back below 6060. This would be the safest short as it turns into a look above and fail of 6060-6062.75.

Trading into 6072-6073.25 gets a bit tricky.

A fail or look above and fail could still be a short, but sellers would once again need back through 6060. I’m open to taking this short (always based on how the session is developing) but would be extremely careful (keep it tight) until back below 6060. Because of this I can’t rate it much higher than a B-

On the flip side, a hold of 6060-6062.75 from above after such a fail is a valid long looking to retrace the rest of Friday’s sell. Like the above, there would be less certainty than the first couple of setups but this one is rated higher than the above short. I would give it a B. To be extra clear, I would want supportive session information and I’m not talking about entering long the moment it reclaims. I would want to see some kind of higher high above at least 67 or so that comes back and finds support at 60-62.75. It would be even better to trade all the way up to 72-73.25 to assess the strength of sellers first.

If we trade all the way up to Friday’s high then we still need to be cautious of a look above and fail with 88.5-90 sitting above. If we trade higher first then I will rate this a B- setup, knowing that price would need to get trapped back below 6060 for anything exciting to happen. If we had already traded lower first and triggered the look below and fail long, then I am far less likely to take this as a directional short. I would still consider it but more than likely I would get neutral by hedging a long position with a short and seeing what happens at 60-62.75 if seen. This is a “hedge the edge” situation if you are long and long biased.

All of the above setup would be similarly true if we happen to trade all the way up to 6100s in a straight line (Santa Rally who knows).

NQ is far less clean than ES for intraday trades so I’ll just be general. Basing above 825-835 should retest Friday’s high. Again, I wouldn’t jump at slapping a reclaim but consider a pullback long from above.

We could see rotational trading between 790-825 if 790-798 is reclaimed (after hours took it lower).

Between 747 and 790 could be incredibly choppy.

Below 741 in theory could see rotation down toward Friday’s low but there was a ton of demand left behind, so I’m not interested in trying to short back through that.

I would generally be looking for longs below 741 but just patient and selective. If buyers don’t show up between 669 and 747 then it is probably rotation time, and I would be looking for RTY and YM to gain strength.

RTY and YM

RTY

Given the potential for rotation, I’m open to taking a shot at a long on these dumpster fires. If RTY is holding 2335.7-2337.5 or (better) sees a look below and fail then I’m even open to taking a flier (like lotto size) on Jan calls. Something cheap and OTM. We’ve seen RTY do this before, lower highs and lower lows for days at a time and then it just explodes. Manage on your own but it is valid. This would likely require some relief in bonds and it is probably smarter to wait until after FOMC this week but keep it in the back of your mind.

YM

Given YM is less sensitive to rates it might be a safer play ahead of FOMC as a bottom snipe. Similar setup as RTY, a look below and fail of last week’s low is a long to 44099-44132 and monitor for continuation. The entire 43714-823 range could hold. If not it probably comes down to 537-579 which would be another valid location to try. Individual YM names are another way to play this as opposed to DIA calls.