Interestingly enough we were more interested in this short today with the market rallying than if it had been selling off. Why? Because had the market had been selling off, while very oversold, we'd be looking constantly for signs of reversal. Instead the market gapped up and ran while MON showed excellent relative weakness. Set-up at 70 was excellent and worked for over 1.5 points.
Trend day down through major support lines -- we're too oversold to short and we're still looking long into panic selling tomorrow. However the 50 SMA and trend-line are broken and technically the rally from March is over for now. A new range now has to be created.
We had a good day mostly due to our SPY trade. Here is the excerpt from today's newsletter:
We wrote last night "If we can get to the SPY 105 area tomorrow (while in an oversold state) we feel that it would be a very good risk-reward candidate. We would be buyers, in size, of the first touch on trend-line tomorrow near SPY 105 and would be willing to spill some blood in order to stay in the trade in case of panic selling beyond the number." SPY broke the base, crashed through 105 and reversed for a bounce before taking it out again later in the day. A 50-60 cent bounce might not seem like much but remember, it's all risk-reward. If we're risking 20 cents then 50-60 cent profit is very good.
If you held of course it would have been a different ending. We've been having a lot of success lately buying the move away from the EMA (5 min/20 EMA), into support, and then selling into the bounce back into the EMA.
We're oversold and heading into the trend-line and 50 SMA on the SPY. We'll be buyers of this area if we can hit it tomorrow. On the other hand if we work off our oversold status in a few flat days then we will be short into support. One of the most important things about support buying is to know how oversold a stock is by the time it hits support. In practical terms: If we hit SPY 105 tomorrow we will go long. If we base here for a week and hit SPY 105 next week we will go short.
We've been talking about this SPY 110 gap-fill area for months and now that we're finally here the market seems stuck. We have formidable resistance above and a solid trend-line below. One of them has to cry uncle soon. For now we've switched from break-out trading to buying support. If SPY 110 finally successfully breaks to the upside then we'll go back to break-out trading. If the trend-line breaks down we'll switch to shorting support. But for now what has worked very well is buying support, on daily, and also the 50 SMA.