What to Trade These Days

As Bella pointed out, last Friday was difficult. There were so many reversals that it was frustrating to trade any stock. Market stocks overreacted to moves in their corresponding futures and levels were not respected. I lost on so many fade trades in which I would buy a stock that quickly retraced to a support level and continued going lower without putting much of a fight at the level. You see, in a trending market when a strong stock quickly pulls back (moves 30-40 cents in a minute chart in a $40-70 stock) to a support level after showing strength, you expect to be able to fade the stock and quickly make 20-30 cents without much risk. In fact, this is a play I have been making tons of money in lately but not last Friday.Certainly shorting at a support level after the stock pulls back quickly to the support level is not very favorable from a risk vs. reward perspective. The path of least resistance on a strong stock at support levels is to go up, so naturally shorting at these levels is not a high probability play. Yes you could hit the bids to get short right below the support level and play momentum but you are prone to get shaken out 80% of the times because any up tick or decent held bid would cause you to cover right away (as we call it: the buy below support level program). Then again on days like last Friday in which this fade play worked about 10-30% of the times it doesn’t make sense to play either side. So what does one do?You could choose to stay flat all day, save yourself some money and save yourself the frustration; Or you could adapt to the market and find a way to win!. So rather than continue struggling trading AAPL, RIMM and other market stocks off their corresponding futures I decided to trade SPY. This is an ETF whose volatility has not died down at all, has plenty of liquidity and trades quite well at times. And boy what a difference this made let me tell you. As a fade trader I found myself fading dollar moves when it slowed down hoping to catch 15-20 cents on the play but rather I would catch 30-50 cent violent reversals. I jokingly called it the yo-yo effect.While most market stocks were going above and below a level on heavy volume on these market reversals, the SPYs actually established some descent support and resistance levels to work off of as seen in the chart below. In the chart you will see that the SPY traded much cleanly than AAPL (or any other market stock for that matter). I compare some of the breaks, support and resistance levels. I hope this gives you an idea of how nasty things were on Friday.aaplspy.jpgOn Monday I am going to continue trading the SPYs on the open. When things settle down around mid day I will flip through a few market stock charts to see how they are behaving. If the market is not being absolutely silly with the reversals then I will look to set a bunch of alerts at support and resistance levels I can fade. Should the market continue the yo-yo effect then I will just continue trading the SPYs until the market finds some direction.Enjoy the rest of your weekend.

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