BarroMetrics Views:

The trade I have on in the S&P’s is a good example of how I view trading: each trade involves assessing when the probabilities favour a successful outcome, re-assessing the probabilities when new information suggests that the probabilities may change and taking the appropriate actions.

The trade began when price, time, and structure came together. The setup was not the one I favoured most: I would have preferred to see the market move above 930, hold 940 and then accept below 923 (basis cash). Instead the market broke on average volume and ranged on May 13. I initiated positions at 888.75 with stops above.

The inside day on May 14 that had a higher close was declining volume; so this augured well with the shorts I was holding. But the next day the break to new lows was on below average volume. This suggested a possible rally to come.

I was now faced with the problem of what to do with  the shorts: exit or hold?

I decided to hold and exit if May 18 closed with a bullish conviction bar: this involves an open that is at least no higher than in bottom third of the day’s range and a close that is at least no lower than  top third. It also requires at least normal range (mean+1 to mean -0.5 ATR) and at least normal volume.

The next day the market had an open-gap (see Context and Trading). I initially closed my shorts when the market broke the first hour’s range. But by 4:00 PM EST, although the range suggested strength (25 point ATR), it was not supported by the volume: that was below the volume of May 14! So. I reinstated my shorts.

The initial stop was used for the reinstated position. The Market Delta volume on May 18 suggested that we’d see new highs and given the context (see Context & Trading), I was looking for a small range day for May 19. The market obliged.

The move was now at the crossroads: the rally from the 978 low to 916 represented a retracement greater than 0.618. But the price action above the 0.618 mark indicated rejection. Acceptance above the high of May 19 would suggest a move above 930. I determined that if I saw that by end of trading on May 20, I’d exit half my position. I’d look to reinstate if the market popped above 930 and then re-accepted below 923.

The reason for this view? The small range day on May 19 that followed the low volume up day on May 18 meant that I had a possible sell-setup if my original analysis was intact. While I had decided not to add to my positions, I felt that I should exit half if we had a conviction up day on the basis that the market had a chance to sell off but instead it  rallied.

Fortunately, by end of trading May 20, we had a strong day down (reversal bar) on excellent volume.

With Memorial Day coming up on Monday, I expect the market to be relatively quiet on Friday’s trading.  This is being written on Thursday 10:50 EST. At this stage, we have a gap-open down with the market unable to cover 50% of the open-gap. Normally I’d expect a trend day down. But I consider it unlikely given the holiday because it is unlikely  large new short positions will be opened till Tuesday 26.  We may get some long liquidation but that would be about it; long liquidation seldom fuels a trend day.  Still with the gap not filling, we have a moderate probability of a down day.

Figure 1 shows the 5-day swing (weekly trend); Figure 2 the normalised volume.

Figure 1 5-day Swing

Figure 2 Normalised Volume

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