Friday morning the SPY was gapping to fresh highs for the year with plenty of other leaders gapping to Supply levels. I had a watch list compiled to focus on at the open and Arcelor Mittal (MT) was one of them on my list to short. MT was a stock that had an extended run on the 60 min (chart not shown) the day before and was gapping into an area of Supply (see 15 min chart below). Therefore, this made MT a viable candidate to fade short at the open on the first sign of weakness.

I split my position in pieces since I was entering on a very short term timeframe, but with the bias of the longer term charts. Here is how the trade broke down…

Today I took one trade at the open that made my day. It was a long in FAZ which yielded me over 6 times my initial risk amount. For this particular trade I had a dollar stop and / or a break below 44.00, which ever came first and a wide open target. I was only focused on managing my risk and adding to the position as it moved in my favor. I knew I had to be real careful with the “adds” to keep my average cost low enough to compensate for the volatile nature of the way FAZ trades. IMO, I was too conservative and should have been more aggressive near the whole at 44.00 where I only picked up one lot.

Obviously, not all trades work out quite this way. That’s why it’s important to follow your strategy for picking and managing your trades consistently. Because over time, you are going to get the handful of trades that are going to run and reward you for your efforts!

Good Trading

David

As we can see from the weekly chart of the VIX below, it has approached a level that on two previous occasions confirmed a market that was in very high Demand. On these two prior occasions, we had the completion of not one, but two Inverted H & S patterns which produced a significant advancement in the market.

So the question now is, have we put in a bottom? Can we rely on the Big money to begin to flow into the market to begin a bottoming process as they have in the past? Or is this just a pause before the next leg down? This will only be known over time. I believe it’s to early to call this a bottom because the market hasn’t showed any signs of a bottom yet. However, we are at a place where Demand for a piece of this market was so strong, the result was a 100% retracement of the mid 2008 highs and then some.

As of this writing we are currently sitting on top of the prior Demand level, which is currently around SPY 110. I believe we will drop further into the 110-100 level, which was where the Inverted H & S pattern formed. And if that happens, I can almost assure you CNBC and all the various financial media outlets will be going nuts reporting how the world is coming to an end and the VIX is soaring to extreme levels, which it probably will.

So if I was an investor or managing someone else’s money, I would be putting on small positions in stocks that have shown Relative Strength to the market with a stop below SPY 100. However, if we don’t hold SPY 100 and we don’t form any Bullish reversal candles on a weekly basis – Hold on to your SHORTS folks, it’s going to be a wild ride.

I will re-visit this topic next week after we get a close of next weeks trading to see where we are.

Good trading and keep those stops tight!