I couldn’t have said it any better than Josh did and I appreciate the fact that Chris added ‘applies to markets‘! After Friday’s rally lots of people on Twitter talking about new all-time highs for the markets. Someone even tweeted at me “Short $spy = financial suicide until it hits 600 on 1/1/25”. He could be right or he could be wrong. I certainly have no idea where SPY will be trading at the end of next year! However, I do know that IF SPY or SPX is going to go up then I’ll be able to trade it based on the charts. The same applies if price is going down. And we all know that, over the course of time, price is going to go up and down. That’s why most of us trade. So, instead of making predictions of where the market will be in the coming weeks or years why can’t I just trade it ‘in the now‘? Let me show you how I do that.
First, take a look at my tweet from last Thursday. I was pretty well convinced that the rally was likely to fail and price would eventually drop below the 4114 low. Oops, that didn’t work out too well, did it? However, read the entire tweet. I also said that ‘bear needs to break below 4137 to confirm‘. Where did I come up with that price and did that happen? BTW, on any of the tweets shown in the post below, I show the time (EDT) and the date of the tweet. If you’d like to enlarge the image attached to the tweet just go my twitter timeline and find that tweet.
Price did pullback following the high at #2 but it did NOT drop below 4137! That price level was important because it was the 61.8% retracement of the prior rally and no matter how crappy a rally looks, unless the bears can take price at least below the 50%-61.8% Fibonacci retracement support zone of that rally, and find acceptance there, bulls remain in control of the price action and I can use the Fib extension tool to project the next upside target.
Before I move on to the Fib extensions, take a look at a previous tweet discussing a similar weak-momentum rally. /ES was at 4210 at the time of this tweet and the ensuing pullback took price down by almost 100 points to 4114!
As price moved lower I continued to tweet about the bear’s script for lower prices.
And then price broke down again after not being able to find acceptance above 4197.
As /ES moved lower than even the projected targets I started tweeting about the weakening momentum of the decline. It was a good time to be reducing downside risk and preparing to add some bullish trades.
At this point I’m identifying the specific trigger for a bullish trade. Price had to reverse the downside momentum. Pointed out how this wasn’t a good place to be adding short Deltas! You’d think that would go without saying but you’d be amazed at just how many retail traders are still shorting after a big move down!
And then there was this tweet when price was finally starting to reverse the move down and turn it up. Price did clear 4118.50 to the upside and rallied 100 points higher as of Friday’s close!
The point of posting all of those tweets is to show you that you can prepare a script of what price is expected to do based on Fib retracements and extensions and then supplement that analysis by utilizing the 8 SMA bands to identify momentum as well as good trade location. I’ll finish this post by covering the Fib extensions I mentioned before and the 8 SMA bands.
The chart below shows how price found resistance just where it should have at the 100% Fib extension of the rally from #1 to #2 followed by the pullback to #3. However, instead of a strong rejection and reversal lower price tested that level for multiple 15 minute candles. That was an indication that sellers weren’t strong enough to turn price down and that a break back above 4207 would likely target the next Fib level at the 123.6% extension. Price really struggled in the attempt to reach that target and the momentum was extremely weak! See the MACD below. Rally over? Maybe but until price starts breaking down below support then bulls get the benefit of the doubt!
Last, but certainly not least, the 8 SMA bands that I rely on heavily in my trading! They are reliable indicators of momentum, trend and good trade location on any time frame! In the /ES hourly chart below, notice how well the bands worked for identifying a change in the character of the price action. When the bands are rising then the trend is up on this time frame and the lower band is good location for a long (bullish) trade. When the bands are declining then the trend is down on this time frame and the upper band is good location for a short (bearish) trade. The first candle that closes outside of those parameters is often a first sign of a trend reversal. It should be a reasonably strong close outside the parameters otherwise it’s just as likely to be a good opportunity for a continuation trade instead of a reversal. A second close confirming the first one raises my confidence level even more. Using the /ES hourly bands to identify trend, any short (bearish) trade taken since last Wednesday evening has been a counter-trend trade that is very likely to see a drawdown!
That’s all I have for now. If you have comments or questions leave them down below.