Sunday, October 09, 2011

The easy trade, the fade, and now what

We always regret not calling ourselves “Base Trading Group — BTG” instead of HCPG.   Everything in our strategy circles around how we trade around the base.     Friday was as text-book bread and butter HCPG trade as they come — short the first touch of the descending 50SMA after extended run.  We’ve written about this for years and we imagine most of our subscribers were involved somehow in this trade.
We wrote on Thursday on our stream to “fade the job’s number pop” and we wrote emphatically in our newsletter to short 118.     The jobs number came at 8:30 –   short the 50SMA on the $ES_F at 1174, or short the pop to 118 on the $SPY pre-market.    For our way of trading–this was as “easy a trade” as they come — what comes after is a bit more complicated.    Is the rally over or are we just basing for higher run?   We have some decent set-ups long that just need a bit of time (3-4 days would make them look fantastic) so we’d be in the camp that would argue that the rally is not over yet — but we wouldn’t put any swing money on that either, we’re still in daytrade mode.
Perfect ES_F touch and fade from the 50SMA.   Very extended run straight into first touch of the descending 50SMA.   This is as essential HCPG type trade as they come and hopefully a lot of our readers/subscribers nailed this trade.
Here is the 5 min chart — note how extended it was from the 20EMA — again, lay up as it follows everything we teach — extended from base on every time-frame we follow.
And $SPY in pre-market short against 118, text-book.   These are the types of opportunities that don’t come often — when they do they deserve much more aggressive type of size positioning.

For weeks we wrote in the newsletter that we were looking for a bounce scenario in which the August $SPY lows would be broken and the 1077 $ES_F overnight lows would be tested, hold, and bounce.   That’s exactly what we got with a 10% bounce that was sold into the 50SMA.   Both these trades, in one week,  were easier to predict (because of their extreme oversold/overbought nature) than the range we have experienced for the last two months and we imagine what will come in the next several months.      What we are looking for now is a flattening of the 50SMA — a multi-day base under the 50SMA would be ideal– and then a rip higher (and we have multiple long set-ups already setting up giving some credence to this scenario) out of the range.   Note the taking of the 50SMA would be quite important technically as 1) it has not been overtaken since the correction started and 2) it is steep slope descending, making it quite strong.
(If you want to learn more about fading first touch of 50SMA, and waiting for flattening of the SMA –again, critical to how we trade—- google “flattening”  or “first touch” in the search box of our old blog at )
New lows of course are always a possibility — and the action in the banks are probably the biggest argument for this scenario.    Long term visibility is low meaning conviction for longer time-frames is low — we’ll be sticking to day-trading until we return to a trending market.