I have posted many times over the past two weeks about the growing pattern of early morning gap downs and then an attempt to push back up. This morning the same pattern once again appeared. You can see in the 1 minute chart below that this time the S&P 500 broke through 1680 and at the time of writing this post, investors are attempting to push back up.
In an email to subscribers of my free daily updates I wrote that this pattern cannot last much longer. This is because each test of the 1680 support level weakens the investor resolve a who are buying stocks as it falls to support. Eventually they will move their bids lower. Once 1680 breaks investors will keep moving bids lower and lower until they see more investors back buying. The 1680 to 1700 levels in the S&P has made for some terrific trades in the market direction portfolio, trading for pennies trades and the Spy Put Options.
Market Direction Breaking 1680
You can see in the chart below that this morning’s drop in the market direction punched back through 1680.
Trading This Morning Pattern
Eventually this early morning sell-off pattern will end. Until then though I have been trading the two sides of the trade in a very simple format. I look at the morning futures and if they are weak, I buy 50 Spy Put Options contracts one week out at the money, and use a fairly tight stop of around 15 to follow the market direction of the S&P 500. For those few days when the market direction has moved higher the losses have been contained to around $750.00. The downside action though has more than made up for a couple of losses.
By using the stop-loss to follow the movement lower I have been able to pick up decent returns and a few times I have been taken out near the bottom of the day. This method should also assist with following those days or that day when the market direction finally breaks lower.
For a stop-loss I have not had any fast rule and I have adjusted throughout the trade. Many times the stop-loss has been as tight as 15 cents and as wide as 50 cents. The Spy Put Options trade as readers recall, is a short-term trade normally lasting half an hour to a few hours but rarely longer than a day.
Once the bottom appears to be in for the morning, I turn to the IWM and enter into the trading for pennies strategy and trade one or two trades looking for the best setups as explained in the Trading For Pennies Strategy outline.
Pattern Will End
This has been an excellent means to enjoy great returns while waiting for the market direction to decide whether it will move higher or lower. Presently the market direction outlook is still pointing to further weakness. This morning sell-off pattern will end but until then I am using the futures and my market direction technical indicators to guide my trades.
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