Signals & Trading Plan for Monday 10/21/19

Updated Sunday 10/20/19 at 6:30 PM EST

In this weekend analysis, we will try to address a number of questions that our readers have been asking.

Non-trending Market
We have been using the term “Volatile Market” to describe the type of market that stocks have been in since mid-September.  This term is causing some confusion, so we are going to re-label it “Non-trending Market”.

As this label implies, stocks are not in an Up Trend or a Down Trend right now.  $SPX $NDX have been going sideway in choppy trading conditions since mid-September.  $RUT have been in this Non-trending Market since late February this year.  

Knowing what type of market stocks are in is important, because it dictates our trading strategy.  

In calm Up Trend market, it’s a lot easier to make money.  We enter and add to our positions during the Dips. We hold for longer periods of time.  After a while, stocks will go up in Up Trend market and we are likely to make money.

Down Trend is a whole other beast that we will write about in another post.

In Non-Trending Market like right now, we have to be prepared for rapid small swings up and down.  Therefore, we cannot hold our positions for too long. We try to buy lower, sell higher, and repeat.

Note that while it is possible for volatility ($VIX $VXN) to drop down into a lower range, stocks can still stay in Non-trending Market longer.  We are in that scenario right now.

Stock market sometimes needs to spend time in Non-trending Market while the bulls and the bears fight it out.  Eventually, one set of sentiment will prevail and starts to dominate. If that sentiment is bullish, stocks will pivot into Up Trend from Non-trending Market.  Conversely, if that sentiment is bearish, stocks will pivot into Down Trend.

$SPX $NDX $RUT are in Non-Trending Market right now, but in the intermediate term time frame, $SPX $NDX  are  likely to resume the Up Trend that started on 12/25/18.

Know your individual market 
Many of you have asked for our opinions about European markets, Asian markets, emerging markets, gold, oil etc.  We must apologize again and say that we do not trade anything but $SPX and $NDX.

We monitor small caps, the Dow, global stock markets, as well as bonds, gold, $USD in order to identify macro patterns.  But we do not trade them. We use this information to provide context for the movements of $SPX and $NDX. 

We have learned the hard way that trying to trade too many markets is likely to lead to losses.  We cannot possibly understand the nuanced moves of so many different entities. We have no trading edge when we attempt to trade too many markets. 

We urge you to reduce the number of markets you trade in.  Just ask yourself before you place a trade in a particular market: what is your edge in this market?  Do you have any additional data to support your thesis besides chart patterns?

Know your time frame
We also urge you to pay close attention to the time frame in our analysis, and in your trading strategy.  Stock movements are highly dependent on the context of its time frame. It is possible for stocks to start a small swing downward on the hourly chart, while they are still in an Up Trend on the daily chart.  This is otherwise known as the Dip.  

Based on the questions we have received, we want to clarify.  We always try to provide you with long term and intermediate term guidance so that you can understand the context of the short-term market moves.

However, when we discuss the actual trade setups in our post, we are discussing short-term trades that are likely to happen in 1-3 days.  

We have found that it is possible to identify the high-probability short-term swings that may span the next few days using our trading system.  Combining this with the information from the S/R table and good position management techniques can lead to a profitable short-term trade. Many of you have written to us to share your success in doing this.

However, price actions in all time frames are driven by price levels, and supply and demand at  different price levels. In other words, stocks will continue to go up until they become too expensive and bring out a lot more sellers.  Conversely, stocks will continue to go down until they become really cheap and bring out a lot more buyers.

It is not realistic to make projections such as “stocks will go up for 3 days, then down for 2 days, then up again etc..”  We are highly suspicious of such time-based predictions because no one has that kind of crystal ball.

This is why our trading system is based on price levels, supported by other indicators such as market internals.  

The rest of this article covers:
Table of support and resistance levels
Projections from market internals
Planning your trades

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