Tonight I shall conclude the series by highlighting the importance of managing a trade by preparing for possible market outcomes.
Entry for this trade was the directional bar close below the Primary Sell Zone following a RePo setup. Entry on the close of Jan 9 2009 was at 882.75. Since all other stops would have been too large, the stop was placed above 10% of the Jan 9’s directional bar range added to its high - basis March, the stop placed was 911.7. This was a risk of about 30 points. Using the Rule of 3, I’d exit the first 1/3 at 882.75 - 60 = 822.75, basis March.
This first 1/3 exit order was placed in the market. We saw the S&P last night move below this price.
Last night, we also saw the S&P bounce of cash support at 817. In addition, it formed a Neutral Day closing in the Upper Extreme (just). These are all signs of a market in need of a short covering rally.
Given we have CPI today, I do expect to see some short covering. I also expect to see the market attempt to breach the 853.00 resistance. If it can get through that, I’d expect the resistance basis 50% of the M period Gap (856 - 857) to hold. See Figure 1.
Ideally the attempt above 853 will fail and the market will have a small range day on low volume. This is not what I expect - it may happen and then again it may not. But it would be my ideal picture from a bearish point of view.
My stop for tonight, for the reasons I outlined yesterday, would be above 868.20. In the parlance of yester-year: 868.20 MOC OCO 871.20 stop. Nowadays, with online broking, I work the MOC orders.
What is important to notice is I manage my positions by always seeking to create scenarios that allow me to respond rather than to react to the market - what Nic Tasler in the Impulse Factor called the classic Risk Manager’s decision-making approach to risk.
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Rick asked two good questions:
- What is a RePo? It’s in Nature of Trends: think of it as a continuation upthrust. The pattern has the same conditions as the Upthrust. Generally it takes place within the context of zig-zag correction. The fact that it marked the end of a Running Correction was a bonus.
- What made me change my mind? The volume - in Figure 2, we see how the normalized volume failed to confirm the new highs in Jan 2009.
FIGURE 1 Composite Market Profile
FIGURE 2 S&P Daily
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