Recently I euphemistically told my son that he needed to “pick his spots” when confronted with a series of less than optimal choices. In the market you always should pick your spots. Some you want to wager on and many you do not.
Over the past few weeks I have been using the general market proxies of SPDR S&P 500 ETF
(SPY) and the PowerShares QQQ Trust Series ETF
(QQQ) to demonstrate both how and when to pick your spots.
When trading there are always so many temptations to do something, but in reality, the less you do the better most of the time. There are times to make trades but, for the most part, you should remain patient and allow the trades you already have in place to work. Trade entry is critical to trade success. Picking your spots is essential.
I would invite you to look back at the spots
I chose over the past six weeks to alter my stance. I chose those spots carefully so as to increase my probability of a great entry. I utilized various neoclassical TA techniques to guide those decisions (you can look here
to find all the articles). All were high probability setups that possessed a high likelihood of resulting in profits. The most recent setup was centered on the notion that an imminent retest and regenerate sequence was about to unfold (see Expect 'Retest and Regenerate' to Come Prior to a Break of Anchored Resistance
That is indeed what took place on Friday’s jobs disappointment.
Now that the retest and regenerate sequence has unfurled, it is time to read the tea leaves that were dropped by traders in the wake. Below are two charts; the first was posted in last Tuesday afternoon’s article (linked above) while the second is the same chart just two trading days later. In last Tuesday’s article I identified the $134.37 to $134.85 area as the ideal place to do some buying if the conditions were right. $134.85 is exactly where the SPY traded to. Even after all these years I am sometimes amazed at how these numbers work.
(All charts courtesy of www.investools.com.)
What you have to ask yourself when looking at the latter chart is, “Is the retest and regenerate sequence finished, and was it successful?” If the answer to both questions is true, then this is one of those spots
worth picking. Let’s take a moment to consider it.
A retest and regenerate sequence requires price to retrace back to the prior swing point high bar that was surpassed. That is what happened Friday. When a retrace occurs within six bars, the retrace typically tries to get to the other side of the bar. In this case, that is the low from June 19th. That price point was $134.47 but that’s not the only factor in place. Sometimes there are other factors which can hinder a full retrace, and in this case that is true and I’ll return to that thought in a second. For now, let us concentrate only on the retest and regenerate zone highlighted in the chart.
The two bars that are critical are the swing point high bar that was broken (June 19) and bar that did the breaking (July 2). Volume on the former bar was 137M shares and the latter had 129M shares. Friday, volume came in at 150M shares on the retest. That is not ideal. That does not make for a higher probability reversal trade. In fact, it argues that the higher probability is that the test should continue.
Now the other side of coin (yes, there’s always another side) is that the anchored support zone has significantly more volume associated with its anchor bars, namely the April 10 and June 29 bars when compared to the volume witnessed on Friday’s selling. Thus, it may turn out that further testing won’t be required, but the higher probability outcome is that it will. For this reason, if anything, Friday was a day when you should have, at most, just tested the water on any purchases you may have made. The larger buy signal hasn’t triggered just yet.
Given my bullish bias at this juncture, what I would prefer to see is further testing. I want to see a retest of the lows from Friday and maybe even a little more. I want see that selling occur on lighter volume as compared to the June 19 and July 2 bars. I want evidence that the sellers are unwilling to sell at lower price points. Then I would prefer to get closure to the selling with a candlestick reversal formation. That is the ideal case. Will I get that? I don’t know because in trading, very little is ideal. There are varying degrees of ideal which is why scaling into and out of positions makes so much sense. It’s why some trades are high probability but most are not.
If you took Tuesday’s signal of an impending retest and regenerate to heart and did some selling, then yesterday’s test was the opportunity to do a little reloading on the long side just in case that is all that you get. What would really get me buying though would be if the sellers told me they are through. The ideal conditions are listed above. If this retest and regenerate sequence does end up as regeneration, then the target is another 3.5% higher than Friday’s close as shown here, and that’s worth buying into.
No positions in stocks mentioned.