Reasoning Behind Our SPY Short

Discussion in 'Trading' started by ShadowTrader_08, May 6, 2009.

  1. ShadowTrader_08

    ShadowTrader_08 ET Sponsor

    Let us review the daily chart of the S&P Sep Receipts (<B>SPY</B>) below to refresh our macro view of the broader market before we drill down on a 15 minute chart to discuss the reasoning behind our <b>SPY</b> short entry yesterday.

    <img src="" width="560" border="5" height="650">

    Both of the trendlines that we pointed out in yesterday's <i>Big Picture</i> continue to be viable resistance to an advance of the <B>SPY</B>. Today we added a Fibonacci Retracement that is drawn from the high on August 11, 2008 to the low on March 6, 2009 (magenta circles). Interestingly, the 38.2% converges with the top line of the ascending channel and the blue dotted trendline just above the <B>SPY</B>'s current price as highlighted by the orange circle.

    Now let's dig deeper by reviewing the last two days of trading and the final catalyst that moved us to place a short trade on the <b>SPY</B> yesterday.

    <img src="" width="560" border="5" height="650">

    Above is a 15 minute chart of the <B>SPY</B> for Monday and Tuesday of this week. Based on everything we discussed in yesterday's <i>Big Picture</i> we were very focused in our observation of yesterday's market open and how price would react in the face of two solid resistant trendlines. We extended the ascending trendline (magenta) from the strong move higher on Monday knowing that price would have to break this level first to have any chance of going lower. But even before the ascending trendline was broken yesterday, we noticed a double top had formed made up of Monday's high near the end of the trading day (first red circle) and the second top early in the trading day on Tuesday (second red circle). This price pattern gave us the extra confidence we needed to execute a short entry just after the ascending trendline was violated.

    Trading was very choppy throughout the rest of the day and we maintained our short <B>SPY</B> position into the close. Our plan for today is the following. If the market opens with a gap below yesterdays low, we think price will move lower and provide some relief to bears. It may retrace to fill the gap, but then should proceed back to lower price levels. A gap open under yesterday's low will do two things. First it will cause many longs who were not motivated by the overhead resistance levels to take profits to finally do so. This selling of course will beget selling. Secondly, a gap open under yesterday's low will violate the double bottom price formation (yellow circles) which by itself is a bearish event.

    Now we are not advocating the end of the rally just yet, we have too much respect for the brutality this market can rain down on a trader caught on the wrong side of the trade. But a gap lower at the open should cause enough selling where we can pick up 2-3 points on our <b>SPY</B> short.

    We can already hear readers saying, "That's great Mr. ShadowTrader, but what would make you think the market is going to gap down in the morning?" The answer is this. There is nothing specific that makes us think the market will gap down in the morning. However, the possibility of it happening tomorrow is not unreasonable in our minds due to simple math. Think about this. Yesterday, the <B>SPY</B> closed at 90.57. The low for the day was 89.84. The difference between these two numbers is 0.73. So today's opening price must be lower than yesterday's close by more than 0.73 to be called a gap lower. To help ourselves gain perspective on the reality of this occurring without a wicked computer based statistical model we instead ponder the following. 0.73 is .8% of 90.57 (0.73 / 90.57). What this means is <B>SPY</B> needs to open less than one percent lower than yesterday's close to be called an openning gap to the downside. Of course, the larger the gap the better, but the point is yesterday's price range was small enough where a gap below it is not out of the questions and it is just the type of thing that will scare the bulls into selling. To us, this is not an unreasonable scenario following yesterday's doji.

    This then begs the question, "what if we don't gap down?" That answer is simple, we stay in the trade until we exit for a profit or are stopped out, whichever comes first. Our stop is just above Monday's high at 91.05 so if this market decides it is going higher we will be out of the trade long before any real damage could be done to our trading capital. We gain additional protection as well by following our own repeated suggestion of late to reduce trade size. There is no need to pile in here until the market can establish it's next trend in one direction or the other.
  2. lindq


    LOL! It wouldn't have anything to do with the fact that your post was at 11:30PM and the futures were already down sharply, would it?

    Gosh, you think the market will open down in the morning?

  3. Nexen


    My thoughts exactly.

    Now, it's possible he sent his newsletter to his subscribers before posting it on ET, it would be logical, since they are paying customers. However, that does not explain the fact that he cherry picked this call to post after the current gap down :)

  4. Yet again, I'm seeing the same things you do shadowtrader. I'm short as well.. I'm long SDS.

    Guys, I dont know what time this report went out to their subscribers, but they were spot on with the ascending wedge analysis back in mid april
  5. Nexen


  6. I'm seeing green on small size..?

    Multiply those lots by 5 to a more "normal" lot size (1000 share avg area)

    and they're up $21k for the year
  7. G for God

    G for God

    at least he paid for sponsorship
  8. Futures are moving higher, I dont't know if this was a good position or not. If they keep moving at this pace we could see green within a couple hours. Even if they don't go green expect a beat from the ADP report or massive media spin on the BofA news to push the market higher.
  9. link works for me.
    #10     May 6, 2009