Have you ever missed a trade and asked yourself what to do now?
The rally from June 24th lows has been a great trade for those who got on board a swing trade, yet frustrating for those who threw the towel in near the lows or worse yet added short positions! $SPX & $DJIA “S&P 500 and Dow Jones Industrial Average” have rallied up to just below their November 2012 upward trend Lines, $COMPQ & $RUTX “Nasdaq & Russell 2k” have rallied past their May 2013 highs. So what is a trader or investor to do now?
First question should be, were you trading with the direction or on the wrong side of the trade? Unfortunately just when the press and talking heads were getting very bearish the charts were showing us a different story. Also illustrated in this chart is a white horizontal support line from the June 6th low. This is an area where many longs threw in the towel and also were many inexperienced traders added new short positions. This flush of sell orders due to breaking support causes a high probability area of using up all sell orders leaving no more sellers left to sell, also known as a Bear Trap area. Institutional money and knowledgeable traders are aware of these areas and covered their short positions or at minimum lightened up into this area. The Morning Star candlestick pattern on June 26th “shown on chart” displayed an indecision between buyers and sellers and a potential reversal for price to rally, somewhat of a tug of war between buyers and sellers. Following the Morning Star was a confirmation of the reversal with a green candle closing higher than the previous day “shown on chart”. This bullish candlestick reversal pattern used along with the Bear Trap area gave the green light for a long entry with either a stop loss set below the Morning Star or risk defined with an option strategy. Although the news was bad during this time due to traders being scared of the Federal Reserve tapering Quantitative Easing sooner than expected; the traders who saw this high probability long entry and took the trade have made some nice profit!
The next question is, what should I do if I missed the trade? Price continues to tell us that it wants to go higher with a sea of green daily candles so patience for another high probability entry is key! Jumping in a brand new long position while half the indexes are breaking May 2013 highs and the other half of the indexes are hitting their heads on the November 2012 upward trend Line is NOT a high probability long entry trade. Be aware of these support/resistance areas and these trend lines areas that institutional money pays close attention to and watch price patterns/candlestick patterns for a heads up of which direction price is going. Keep in mind that the rally from June 24th lows has for the most part been overnight gaps “visible on $SPY chart” which means that not a lot of order volume has been exchanged/changed hands to reach these higher price levels, hence it will not take much to push price back to lows again. This does not mean price will for sure sell off to lows, it just means that we’re not standing on “solid ground” and instead on a “shaky foundation”. IF selling pressure were to return the move lower has a high probability of being swift. Basically being patient and sitting on our hands is the highest probability trade currently, the quote from the movie Rounders couldn’t have said it any better…”If you can't spot the sucker in your first half hour at the table, then you are the sucker”. Don’t be the sucker!