Given that this was a shortened week signals should be adjusted and taken in context. True, price ultimately trumps volume, but short days and weeks with a lack of participants can lead to larger variance in price swings and spreads. Friday exemplifies as the indexes were at one point 1% down but volume was also at the low end. Additionally a well known breadth indicator the McCellan Oscillator was at the utmost extreme of it's range this week suggesting an imminent pullback on the horizon.
This brings to mind something I wanted to delve into this week, knowing one's time frame. The importance of this can not be understated because it is pertinent to one's methodology and plan. This concept is discussed in literature so I don't want to recycle the typical rational behind it, rather I want to approach if from the point of breadth and market internals. Typically I'm looking for market health as determined by my breadth indicators to determine the path of least resistance then swing trades on a 3-5 day time frame. I didn't see this as a viable strategy walking into this past week, so I cut my time frame down to day trades and used smaller time frame indicators to determine near term probability of market bias and whether or not there was an edge to trade from the long side.
One thing I didn't want to do is get bogged down in is analysis and looking for indicators to affirm my beliefs and tell me something I wanted to hear. Additionally I didn't want to add more complications in analysis and misplace energy where I don't need to. I already have a solid foundation in place for getting a read when the market is conducive to my trading style and at this point I simply want to hone this skill further, but not to the point of trying to micromanage intraday ticks. My main goal is to continue refinement of my tools and have a cohesive box to place them in. This does not however mean I should become staid and not continue expanding my knowledge base by finding indicators in keeping with the spirit of my trading philosophy.
One thing I looked at this week to get a short term view was the McCellan Oscillator which put in a yearly high reading as can be seen on this chart. Common wisdom dictates that a reading over 300 is an extreme zone and suggest a pullback on the horizon. This was useful information for me to use as a guide to my time frame and risk tolerance. By dropping down a level and using breadth that more closely reflects daily activity, awareness of extremes on this horizon allowed me to adjust my tactics accordingly by looking to exit my positions out at the end of day unless they showed me solid strength by closing at their day highs.
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| T2106 |
For intraday bias I opted to use a scan on my watch list to help me assess if I should be taking entries on that particular day. By being aware of the percentage of my watch list that is moving off the open and showing demand I can gauge fairly quickly if I should trade or stand aside. A couple of days this week less than 10% of my watch list passed my scan during the first hour so this led me to believe that I didn't have an edge because the market wasn't showing an upside bias by my standards. I was adamant this week about not chasing the market but letting it come to me by patiently stalking my list and not letting the fact that there were three positive closes influence me to find trades.
Consequently by forcing patience upon myself this week and having a clearly defined strategy and enforcing stricter price patterns I gained new insight into my holding period. It began to crystallize that if my typical holding period is three days why should I be entering on a day if I would be selling. This in itself began to prune trades off my list quickly because I realized I was not buying early enough off a pivot point and adding unnecessary risk by placing myself at odds with my beliefs. I've been opening myself up to trades that have a greater probability of being faded.
The last thing that I acknowledge was that a shortened week would increase trade variance so I'd have to be even more stringent. This was also insightful because it clarified something I've been addressing for a while now about my time frame, which was how long should I give a trade to confirm my entry and how quickly should I be moving my stop. As a shorter term tactical trader I've too often allowed price to pressure my position and had difficulties determining when I should be ratcheting my stop to move toward capital preservation. During the last uptrend I had the most difficult time deciding what to do on the third day with a position when I opened up my holding period to 5 trying to take advantage of a trending period. Too often by day five I'd turn a slightly positive trade into a slightly larger loss due to bad judgment.
Coming into this week I expect Monday to be a key day to how the week may unwind. I'll first and foremost pay attention to whether or not this pullback continues or buyers step in. Last week we had a slight spike in the HV so if this continues to rise I'll become more cautious until it doesn't. Should it dip I'll take that as a positive. The slope of the 15-30MA differential has flattened and I'll be watching for any deceleration and dip as a caution flag as well. The recent higher low will be the key pivot I'll be watching for the overall health of this move. Until all indicators smooth out and a more linear uptrend commences I'll continue tactically towards short term opportunities until there is a well defined upswing allowing for more aggression.
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| SPX HV |
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