Divining Inflection Points-- $SPY

From January to May 22nd I probably traded the SPY less then ten times in total. Today marked the fourth consecutive day I traded the market via the SPY. I trade whatever is In Play. And right now the market is In Play. The most useful price level in the past three trading days has been 157.50. Useful in that it has allowed me to scale into positions with very favorable risk/reward ratios.

I identified this as a price on June 21st that I would be willing to commit capital for a market bounce play. How I find important price levels, or as I refer to them as “inflection points” is one of the more frequently asked questions I receive. I don’t use moving averages or FIB levels to find these prices. They are determined by looking at charts on many time frames from daily down to five minutes. This particular level was support on the SPY daily chart from the final week of April (you can see it illustrated in the SPX chart from this post). The level was actually SPY 158.30 at the time but as the SPY went ex-dividend on June 21 I head to adjust the level accordingly.

So with an oversold market on June 21st I was able to establish a long against this level with about 15 cents of risk prior to the SPY bouncing $2. The following trading day we gapped below this level so I was prepared for some more downside, and when we bounced in the afternoon I used it as a place to get out of my long position from 156. Today we gapped to 158.20 on the Open and my plan as shared in our AM Meeting and via StockTwits was to add to my overnight long if we pulled into 157.50 again. When we dropped out to this price on the Open The Tape looked like death but I stuck with the plan and added to my position. I was rewarded with a move back to 158.50 where I got flat.

This daily chart from the past few days highlights the important of the level as well.

Part of my job is identifying these important prices in advance so that if the market reaches them I will more effectively execute my trading plan. Short term trading is the toughest type of trading there is, because it requires the greatest number of decisions in the smallest increments of time, so anything you can do to lower that burden may lead to improved performance.