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S & P Anatomy Of A Trade, Results - Not Every Trade Works, Lessons Carried Forward

Thursday  8 October 2009

 The reasoned analysis of the short term S&P trade from Wednesday is anexcellent example of no matter how one views a market, always be prepared for it to be wrong, and the best way to do that is to use stops.  The intra day trend was defined as being down, while the daily trend was on the edge of turning
sideways, but was still marginally up.  Wednesday's intra day activity prompted a covering of half the short position that made lunch money only.  The second half position was stopped out when the previously identified resistance point of 1056 was exceeded, prompting a $300 loss per contract.

Two points are worth mentioning to keep risk exposure manageable.  The primary one is knowledge of the trend.  The intra day trend had been down and on the cusp of turning.  The daily trend was marginally up and close to going sideways.  Under this scenario, the risk exposure of going short close to a resistance
area for a short term trade was small, and it recognized that the higher time frame daily trend was stillconsidered up, so taking a strong stance was not part of the plan.

The potential downside is to the 950 area, so the reasoning both of the analysis for going short and for getting in at a potential turning point in trend was a good risk/reward potential.  One can see from the chart below, Wednesday's activity stayed contained within the upper level of the down channel, but the overnight trade stopped out the position as the daily trend was reaffirmed.

Wednesday's very small range and inside day [high lower than Tuesday and low higher than Tuesday] said demand was absent, [otherwise, price would have rallied higher], but so too was supply absent by not taking advantage of the weakened trend condition.  When the higher time frame trend is up, the benefit always goes to the direction of the higher time frame trend when there is such a lack of demand and supply does not come in to fill the void.  Knowledge of the trend and use of stops kept the trade and outcome within reason. 

Why not go long?  The daily trend is not that strong, and price is near the highest levels since March.  It does not pay to "chase" a market.  The structure of market activity at these elevated levels has many problems we have identified in previous commentaries.  Plus, the high from 17 September and the failed probe from 23 September loom just a little higher, and it does not make sense to buy near important proven resistance.

The third point to make is trade location, implied in the above paragraph.  Wait for a pullback into known support to go long, or wait to see if the trend weakens again, and then go short at known resistance.  Anything in between simply increases risk exposure.

Flat.

S&P Daily 8 Oct 09