"A fool thinks himself to be wise, but a wise man knows himself to be a fool." - William Shakespeare
I've sat down to write this article three times this holiday weekend. If you're new to Traderade, every week I write this Market Prep blog, sharing my thoughts on the week ahead and formulating a trading plan. It's typically fairly easy to absorb and analyze a handful of charts in order to develop a directional bias for the coming week. The fact it's so challenging for me to do that this week is probably telling me something. So rather than be a fool and pretend to know where we're headed, I'm going to be honest with you: I have no idea what's going to happen in the market this week.
In the past, when I saw this much indiscretion and this much conflicting data, I'd simply sit out and not trade. However, I'm aware people read this blog and our mission at Traderade is to help retail navigate the markets. With that said, my best advice for this week (based on the charts we'll review together) is this: Whatever you do, do it small and move stoplosses into profit quickly.
As someone that's been trading for a while, I can honestly say I'm not sure I remember a more precarious scenario to be entering trades than the one we're in now. As a momentum trader, I've been successful letting the "trend be my friend," but the question that I'm struggling to answer right now is "Which trend?"
The longer term trend is down
The shorter term trend is up (higher lows + egregiously oversold conditions)
So, rather than trying to prediction the market direction this week I think it would be a better use of our time for me to show you why I am so torn about which way we're headed. Let's start with the bigger picture:
This Daily SPX Chart shows us that conditions are no longer favorable to longs or large position sizes; Price is back below the 50DMA and under 50 RSI. Looks pretty bearish right?
In contrast, when we look at ES_F with some key technical indicators overlaid (Fibonacci's, Ichimoku Cloud, & Support/Resistance Level) the market looks primed for another leg up, bouncing off all of this incredible confluence.
Even my trusty ol' SPY Model is saying this is a good time to "BTFD"; however, look where SPY sits...right on critical support, with nothing underneath it besides a massive black void.
The 2hr ES_F Chart above give us another view of the precarious place price has reached. We know that High Volume Nodes (HVNs) act as magnets for auction activity. Last week, we lost the YTD Point of Control (POC) at 4140, so odds are a bounce from here takes us back to that critical level. If we lose the Red Line this week, we are likely to fall out of the YTD Value Area (3895 is the VA Low), which opens the door to new YTD lows.
Are you getting the picture yet? This thing could go either way. Literally a coin toss.
Recently, we saw pretty serious absorption from the buyers, and I was looking for a swing long off this confluence area we are in. I initiated that trade Wednesday night/Thursday morning. I enjoyed a great day of feeling like a genius...but the market humbled me on Friday as it typically does and price retraced all of the work the buyers accomplished on Thursday.
My point is this: If the market doesn't know where it wants to go, why should I?
I am not smarter than the market, I am but a surfer trying to ride waves. Unfortunately, there's no discernable wave to ride at this point in time...we're likely in the calm before the storm.
How does one "ride waves"? For me the answer to that question is Range Trading, i.e. initiating positions to travel from one trading range to the next. Price is currently sitting on top of an old trading range high (3922) and normally I'd be bullish above that level, looking for a trip back to 4080; however, WE ARE JUST SITTING HERE. That's not what you want to see if you're bullish...not to mention the 3 recent rejections of the 50DMA.
Therefore, I'll be using the Purple Pivot Line again for my Weekly Pivot, favoring longs above and shorts below.
Most of the charts above look bearish at worst and indecisive at best, but let's look a couple factors that the bulls have in their favor to balance this discussion out:
The High Relative Volume on the 1hr ES_F Chart above shouldn't be ignored, that's typically associated with a "bottoming" formation, as high volume precedes low volume which is generally bullish. There's still absolutely a chance we bounce from here.
(see chart below)
When the Relative Volatility Index hits extreme lows, there tends to be reflexive bounces shortly afterward. We are one of those extremes now...will the pattern continue?
Hopefully by now you understand why I'm struggling to formulate a directional bias for the week ahead...there's so many conflicting signals. And we didn't even mention breadth or sentiment, both of which have been absolutely crushed recently to levels that typically precede bounces!
I honestly think the only safe conclusion we can draw from this data analysis is the market is primed for a large move. If you confidently know which direction that move will be in then I'd love to know the name of your Crystal Ball supplier...
So if a large move is coming (aka a large wave to ride), when is it safe to get in?
To answer that question I think we must accept one important fact: If you want to be safe, you're going to have to be comfortable missing out on some points. For me, I will feel safe taking long trades above 4025 and safe leaning into short trades below 3850. That's a wide range and probably not what anyone wants to hear, but that's how I'm approaching this.
Given where the market is at and all of the conflicting signals, I think those with patience will be rewarded, and those that try to "top or bottom tick" this market will get eaten alive.
Please know it gives me no pleasure writing such an indecisive Market Prep, but I think it's prudent. I absolutely love seeing people make money in the markets using my thoughts/plans/levels, but there's also something to be said about helping people avoid losing money in the markets. If you're trading this week, be safe, use stoplosses, and take profits...I want you to be successful in the long run, not just this week.
Happy Trading,
Horse
"A fool thinks himself to be wise, but a wise man knows himself to be a fool." - William Shakespeare