Thursday, January 8, 2009

ok what now?

Ok we gap opened fairly low right at the important 920 range, and continued straight to the next support point in the 911 range with a low of 912.50, from here we got the bounce I was talking about with a re-attempt at the 920. If you had closed out your short at the open you had another chance to get back in on this attempt. I said that if the 920 will be broken we will also break the 911 range which occured. I had mentioned that the afternoon will be important as we had a chance to setup for a rally here but we broke the 911 at 13:45 and never looked back to go straight for the 903-904 range with a low of the day at 902.37 during the afternoon hours.

We all know where the 903 range is coming from but lets make another simple calculation. 857 low to the 943 peak is a total of 86 points, 50% of that is 43 points. 943 - 43 = 900. You can see how important certain retracements become. Also round numbers present fairly sentimental value as well and markets generally trade towards and around those.

Trade Lesson
Many had asked me througout the day if it was a good idea to short again and I advised against it, unless you got in at the 920 in the morning hours the afternoon presented only a high risk short opportunity. Consider this, while we had a strong day our trade range througout the day was less then 20 points - not a lot to gain there.

Maybe I can use this as an opportunity for a quick lesson - do not overtrade - a mistake many make, me included.

When you come off a strong gain you want to get back in instantly to make more - the majority of the time you end up entering high risk positions, with very limited potential for gains and end up closing out in the reds or only with minimal gains. Rationale goes out the window and you do not evaluate positions with proper risk/reward ratios and stop loss protection. When you have a 45 point run and you are able to get 50% out of it you should consider it a very well executed trade, let the market trade itself out until a new trend is established. For short term traders (which are many following here) the entry with the proper protection becomes very important so do not forget that. If you are more mid term (1-2 weeks) then you are not reading my blog daily and you do not care if you have to carry a position in the reds for many days or even a week. Entry here is not as important but the exit is.

The market presents many opportunities for us. In a given week there are probably 2-3 low risk trades that will give you great protection and a nice risk/reward ratio, probably in the area of 1 to 4. There is maybe one big opportunity a month where the trade presents virtually no risk and a large amount of gains with a risk/reward ratio of at least 1 to 6 or even higher.

Be patient, control your emotions and evaluate risk.

Well we went a little faster then I expected. Considering the strong day we had yesterday it becomes clear we have a chance at the 885. I said the 903 should present a short term bottom but I think we can see a break here by tomorrow. I anticipate it will take a bit more effort to break this number with at least another test before the break.

We will need to go through some distribution here first so expect today to be a bit lighter with a narrow trade range of 20 points max. If we are to see a strong day today the 903 may be broken ahead of schedule. This break will lead us back to a great trading opportunity.

How to trade this?
Well, today is time to let the market play itself out a bit and let it find its direction. We have a few trades available on the edges. First one would be a short at the 913 range with a potential of a run towards 920. I would probably try to stay out of the 913 as it carries a bit too much risk. 920 presents a much better short but it may not be reached today. I would try to avoid any other shorts today even if we break the 900 range as we need to wait for the 890 before we can confirm a break - and that is only 5 points away from the bottom, not enough gains to be had there.

On the long side, if we are to get a strong down day we can enter a very safe long position at the 885. You can probably start with the first entry at 890 and then wait for the 885 or even lower 880 if it overshoots a bit. If this is to occur in the morning hours we have very little risk, in the afternoon we have to be a bit careful and it depends on how we setup to get to this number.

A bit longer post today then usual but I wanted to emphasise the importance of overtrading (maybe I just needed it hear it myself again).


  1. Excellent post!!! Thanks for your time in sharing your analysis!!!!

  2. Regarding your statement that "We will need to go through some distribution here first so expect today to be a bit lighter with a narrow trade range of 20 points max"

    First, great call! And now my question: The need to go through distribution does not appear to be an obvious or otherwise readily available piece of information. Would you be so kind as to provide even a brief explanation as to how you arrived at this conclusion?

    Thank you in advance and thanks again for your excellent posts.

  3. I added some comments regarding the distribution in todays post.

    I always try to look at the possibilities and then post the possible variations for the day, a narrow day was the most likly scenario but as you saw in the post not the only one. The more you work with the markets the easier you can see how they will behave after certain conditions. Wednesday was the strongest day in the past 2 weeks so a continuation of another strong day was less likly but possible and keep in mind a sideways trend is a trend as well, many times a continuation of the previous trend.