I don’t write the Epilogues every day. I like to use them to illustrate points that will help you improve your trading. Yesterday’s severe liquidation break on President* Biden’s tax announcements illustrates three important points.
First, you should always have a disaster stop. Where you set them is personal – more of an art than a science. I tend to use 15 points on the NASDAQ 100, which I trade most of the time. Tracking the Average True Range over the last 14 bars can also help you calculate a stop – perhaps one or two times the range. Believe me, my disaster stop has saved me from more than one news event over the years.
Second, yesterday illustrates the risk in the markets at this time. Biden’s tax proposal was just that – a proposal. It is likely the first volley by our current, Marxist ruling class. It is not the final number. But the markets’ knee-jerk reaction illustrates the delicate underpinnings at these levels. One should decide whether it is worth trading at all until a significant correction – maybe greater than 10% – presents. Such a correction is building right now, as there are many chinks in the armor already.
Finally, the market was saved once again by the Weekly Expected Move low. I mentioned this yesterday morning, not even knowing that such a liquidation break would present. Always have the WEM levels marked on your trading screen. Bailing out below that level yesterday would have been foolish. Perhaps one could make an argument that if the institutions had really pressed the gas pedal yesterday, the WEM low would have been obliterated. It wasn’t.
Another rule I follow, which is not hard and fast but also a savior yesterday, is that I don’t trade after lunch starts in New York. On exceptional occasions, I will take an afternoon drive trade around 2:30 PM EST. So I was not in the market to enjoy yesterday’s bloodbath. In fact, I was writing on these pages in the midst of it. And now I realize that I had not completed my description of the internals screen – which I will do later this morning.
The overnight distribution has a bit of a 45-degree angle to it. The overnight low is also very close to the volume point of control at 4127.75. While it’s not a day to trade near the bell, keep this level in mind as potentially secure in early trade and carry it forward as our line in the sand today for negative bias if it is breached.
Overnight activity since then has been bullish, with a very squat profile and balance squarely within the lower end of the value area. As traders extended the range, the halfback at 4143.50 is a key level and should be marked off as the line in the sand where an imbalance of those knee-jerk sellers from yesterday will start to feel some collective pain. Finding acceptance today above halfback should signal that the break was just short-term, rather than long-term, liquidation.
I would also say with a bit less conviction, that holding below halfback for too long with value unchanged to lower implies that more selling could be coming. But the WEM low, which is about the same as yesterday’s low, is likely to cradle us. If traders could not breach the WEM low yesterday – it seems doubtful they could do it on weekly expiration today.
If the WEM low is taken out today, the 4100 roundie then comes into play which is also the 4/9 volume point of control.
As you already know, I don’t trade on Fridays, especially when we are skirting the edge of the expected move.
Good luck today – but I would not be surprised to see a slop fest trading near the expected move for a good part of the day. The overall bias is bullish as long as the S&P 500 stays above the 21 EMA on the 15-minute cash index chart.
A.F. Thornton