While I believe that the market is setup to go higher, and of course you know that the market could care less what I believe, but yesterdays selling was strong and sudden. That leads me to believe that it was programmed trading and/or coordinated.
Now, trying to figure out what a bunch of bots or institutions are doing is as hard as figuring out when the Philadelphia Flyers will win their next Stanley Cup,. the following trade is for insurance.
Remember that with options there is not only a directional component, but an "acceleration" component. When price moves in a direction and starts gaining momentum, the option will move more - this is also called GAMMA. That's about as technical as I want to be and there are other Members who can offer more details than I.
Let's look at it this way: I believe the market will test that 371.24 level.
But I cannot ignore the confirmed reversal we put in yesterday.
The pattern is called a High Close Doji. Its when price closes below the low of the previous day (or periods) low.
The previous day's candle is called the Trigger Candle and in this case, it happened on Monday.
The rules of a High Close Doji, or HCD, are as follows:
A high is made -this is the Trigger Candle.
Within 3 days a candle closes below the low of the Trigger Candle - this is called the Confirmation Candle.
Thats a confirmed reversal - and when you hear me call a "Confirmed Reversal" this is what I am talking about.
So, the stop would be a close above the Trigger Candle high.
And that's it. Thats one of two of the most high probability setups I use. It is simple if executed correctly and the stop is respected.
Start looking for them on the daily chart.
Also, add in if the reversal happens at a previous area of Resistance, or a +2sd (Standard Deviation) then its even better.
This is how I trade with such high probability. I am more than happy to have a live lesson on this if there is interest so let me know.
High Close Doji:
Trigger Candle - must be the candle with the highest high. The more previous resistance the better. And it is only valid when the market has gone UP not after a period of consolidation.
Confirmation Candle - Must happen within 3 time periords - the sooner the stronger the reversal.
Entry Candle - The day/hour whatever the time period after the Confirmation Candle.
Stop - A close above the Trigger Candle high.
Therefore, I am adding an insurance position, QQQ puts.
You might wonder how I can be long and short at the same time. Well, first of all, this is insurance. If we break the 357.78 level on the daily, then I take the small loss on this trade. But if the downside continues, then I am positioned to make some money.
Also, because yesterday was a moderate Bearish Engulfing candle, I would expect a retrace up to 352 - 353 area. This happens, a lot, on these type of big red candles.
So, here's the trade I am in and sent to VIPs and Traders yesterday.
I am buying QQQ puts. I am positioned sized at 10% of my total.
Now, I know at least I have some insurance and if the market continues down, I will be able to absorb some loss and make money.
One other comment: I put a post up the other day about the market going up.
I still believe the market will test that 371.24 level. I WAS surprised at the selloff yesterday but I still do think that level will be tested. Why?
Because the market is so close to that level that I believe programmed traders etc. will want to see "what's up there" - sort of like a gap. I find it interesting that the day after major firms called for higher highs in the market, all of a sudden out of nowhere we get a selloff. I am not a conspiracy theorist, ok, maybe a little when it comes to aliens and crop circles and the US government being run by Lizard People (shout out to @Eclectic!).
But I do find it interesting that the day some firms came out and called for higher levels, the market pooped its pants. This type of stuff is fun to debate but in the end, I trade price.
I STILL believe the market is going higher. Timeframe, within the next couple of days. But in case I am wrong, which I can be often, I am positioned for it. I don't care about being wrong on directional calls because I am following price.
Here's more of what guides me:
If the Daily time period confirms a reversal with a HCD,
Then the Weekly needs to confirm also.
Then the Monthly needs to confirm.
The longer the time period, the more conviction. Sounds simple but most just call out a direction without any math behind it. Now you can see why I can trade with so little emotion and trust of my calls: its based on sound math and even more sound candlestick reading.
I will try to do a better job explaining WHY I am doing something from now on. My ultimate goal is to teach men and women to fish.
Have a great day!