After a dozen years of trading I have learned that the most profitable trade setups are the simplest ones that take place during moments of market extremes (euphoria/panic). One such setup could trigger tomorrow morning if things evolve accordingly overnight – here’s the setup:
A gap lower in the S&P 500 tomorrow morning would trigger an enticing BUY setup based upon the following conditions:
- An open below 204.80 on SPY would be below the lower 3-standard deviation Bollinger Band (a very high probability long indicator)
- ~203.50 would be the first test of the rising 200-day simple moving average since last October (the first test of this major moving average offers another high probability trade setup
- 203.85 represents a 50% retracement of the entire December-May rally (this fact offers important confluence with the 200-day SMA, the daily S1 pivot point at 203.93, and support/resistance dating back to earlier in the year)
- A gap lower would set the S&P up for its 5th consecutive down day – the S&P has been lower 5 days in a row (including intra-day prices) twice so far during 2015, both times stocks rallied over the next couple of days
As always we will be following this trade setup closely and updating readers in real-time over at the trading room at chat.ceo.ca