Yesterday was supposed to be a follow through day off of Friday’s bullish hammer (all this means is that after a drop intraday from the opening price the closing price reversed and closed at the opening price). I’ve never been into the hammer candlestick because it seems to fail all the time. Even the books say it is a low probability setup (ie., it is not worth trading unless you have other signals confirming it).
So after yesterday’s selloff, today the market is running higher in the pre-market. ES is currently up at +8.50 although it has run up double digits. For the first time in a while, China (via FXI) actually is moving higher (up over 2%+ in the pre-market).
This is the kind of action I expected and why I haven’t decided to enter any short trades. I don’t have the confidence right now that the market is not going higher and therefore I’m subject to being shaken out if there is a move higher (I would be a weak hand on the short side and I know it). I’m still a long trader until the 200 DMA on the broader indexes are broken.
I’ll be watching $TRIN and $TICK for the first 30 minutes to see if this move out of the open has any legs. If I decide to put my toe in the water, I’ll be looking at SMH.
A pipe reversal off the 200 DMA is not a bad setup. I would use a stop of $24.40. In the pre-market, SMH is trading at $25.30 meaning the stop loss is slightly larger than 1x ATR.
Another potential trading idea is XLF.
The index is sitting right on the 200 DMA. The market is unlikely to move higher if XLF isn’t working. So if we’re in the process of a bottom off the 200 DMA/Lehman gap on the main indexes (a big if), the bottom is likely in on the weaker indexes such as XLF.
I’ll end my post this morning by stating that I tend to believe that the market is going lower. I’m not super enthusiastic about buying right here. However, the risk/reward is quite favorable if the bottom is in for the weaker indexes hitting their 200 DMA. So it does seem to make sense to put my toe in the water here. I’ll then add positions if and when profits begin to accrue.
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chartsandcoffee
