Signals & Trading Plan for Friday 10/11/19

Updated Friday 10/11/19  at 7:43 AM EST

Apologies for this late post today.   There seems to be some confusion about our recent posts so we want to clarify our comments.

Is the current Bounce real?
Market internal indicators continue to confirm the short-term Bounce as of right now. 

There are 3 possibilities of how the Bounce will progress:

1. This Bounce retests Support1 before truly rising up. 
2. This Bounce continues to rise up to Resistance3.  
3. This Bounce rises all the way to the high of September 12.  

There is not enough data right now for us to determine which of the above scenario has the highest possibility.

Why did we not enter the Bounce?
We personally choose to wait for scenario 1 because we prefer a low-risk, high-reward setup.  And we have our entry rules which we shared yesterday. They help us filter out setups that are not as favorable.  

We want to clarify that just because our entry rules filter out the current setup (to enter long at this price point for the current Bounce) does not mean that the Bounce isn't real or isn't happening. 

It just means the entry setup for the current Bounce does not meet our own entry criteria.

As we posted on Stocktwits yesterday Thursday, you can always do partial entry at higher prices and protect with a large stop.  You need to be comfortable with the size of that large stop, or use a very tight stop and be comfortable with getting stopped out frequently.

This is a Volatile Market.  There are lots of swings in a Volatile Market.  Determining which swings will be big and which will be small is very difficult.  So we employ our entry rules as part of this filtering mechanism.  It means we personally don’t trade as much in Volatile Market, but that has been a good thing.  

Big Drop or Down Trend to follow?
An important question is what will happen after this short-term Bounce. 

This is a major source of confusion.  On Tuesday 10/8/19, we wrote in our post:

“We are likely to see a short-term Bounce.  But what happens after that may not be so great for traders with a bullish bias, as well as the majority of long-term investors.”

In that post, we also shared with you a chart from the crash of December 2015.   Let’s take a look at that chart again with more annotations.

As the above chart shows, in mid December 2015, $SPX hourly chart formed a double bottom at (A) and (B).  $SPX then climbed up in a seemingly nice Bounce between (B) and (C). 

$SPX then ran into tough resistance at (C) in late December 2015.  Its short-term Bounce got stopped.   $SPX morphed from a Sideway Volatile Market into a big Down Trend that lasted until March 2016.

Take a look at the current $SPX chart.  If stocks rise straight up from here to (C), there exists a possibility that we may see a similar big drop in a few weeks. 

Whether this is just a Big Drop in a Volatile Market that takes stocks down to the low of August, or whether this is an actual Down Trend that takes stocks down much much lower is debatable at this point.   In other words, we don’t have enough data for it yet.

We need to wait for more data as $SPX $NDX SPY QQQ TQQQ get close to Resistance3.  We are also examining more data besides market internal indicators to determine this answer.  

For now, we recommend locking in profits frequently with partial exits, or with tight stops (though they don't protect well from gaps down).  

We will share more analysis in this weekend's post.

Disclaimer
The information presented here is our own personal opinion.  It is intended to supplement your own research and trading systems.  Consider it as food for thought. We are not registered financial advisers or licensed brokers.  We make no guarantee that anything will unfold according to our projections. While we offer scenarios for you to consider in your trade planning, know that you are proceeding at your own risk if you follow our suggestions.  

Note that we trade highly risky 3x leveraged ETFs.  You may end of losing a lot of money with them. They suit our portfolio, but they may not be appropriate for you.    Please read more about them before trading them.