Letting SPY Play Out

The market rally is petering out, and has been for a few weeks now. However, it doesn't mean there won't be a few more pushes up before it finally turns. Although there is a chance it already turned, I'm betting that it hasn't, or at least that it will re-test its recent highs at which point I will get out if they don't break through.

Not to get into too much technical theory, but the strategy I'm using sends a "sell" signal at countdown day 13. I've got the countdown days in black on the chart below. In order to advance the countdown, the close of that day must be higher than the high of two days before.

We're currently on countdown day 10. So we need three more countdown days to exhaust this rally, according to TD theory. The days don't have to be consecutive, so it could take weeks, who knows.

HOWEVER, we also only need three more days of negative setup (where the close is lower than the close of 4 days prior) to cancel the sell countdown. In order to get a "bullish price flip" which would cancel the buy setup (when prices go down), we need a close today over $106.91. If we don't get that, I'm selling my long position, since the odds of it completing its countdown decrease. If we do get that, I'll hold the SPY longer to see if the full countdown plays out.

Another important reason I'm holding a long position, is that for the countdown to "complete", day 13 has to close not only higher than the high two days before, but also over the close of countdown day 8, which in this case is $109.31. This is still below the recent high, so I think a retest will achieve that price even if the retest fails. And it will give me a tidy profit. A couple hundred bucks here, a couple hundred there is how I make a living. Of course I lose a couple hundred here and there also, so the income is irregular.

It's a risky play, but that's why I have a small position. The smallest lot I trade with is 100 shares since it's an even lot and very liquid, and when the order shows up on the screens it blends in and doesn't stand out. For the same reason, if I take larger positions sometimes I'll break them up. Often my broker does that for me to get the best executions, and I don't have to worry about it. Since I'm not dealing in penny profits I don't care.

I'm willing to take a small loss on the SPY to see if it will play out. I won't be able to trade this afternoon since we are meeting friends on the UVA lawn for trick-or-treating at 4pm, so I won't know if we've got the bullish flip until it happens. If the price goes below yesterday's low anytime today, I've got a trade trigger to get out, bullish flip or no. If the price stays above yesterday's low, but doesn't close above $106.91 I'll carry some risk through the weekend, but I can live with that. If I were trading full-time that wouldn't happen, but I need to make some sacrifices to parent my child.

I took profits yesterday in all but two of my shorts-- I'm still long QID and FXP which are the inverse of the Nasdaq and China markets. I probably won't get stopped out of FXP since it's not correlated to the American markets and it's still on pattern. QID I don't know. If I don't get stopped out, it bodes ill for my long position in SPY. On the other hand, I'll make enough profit on the QID if it doesn't stop out that SPY won't matter.

So there you have it, a window into my trading style. Technical trading can be complicated, so I don't recommend it unless you're willing to put in the time. It's not something you'll succeed at if you aren't committed. That said, there are strategies you can use if you can't trade during the day (because I assume most people have day jobs), but it still will take up your time on nights and weekends.