Part of the training the traders on our NYC trading desk receive is instruction on the trading setups that offer the greatest statistical significance for In Play stocks.  What is not part of our formal training is the most statistically significant trades for specific kinds of “trading days”.  Usually, I give a quick comment at our AM Meeting as to how the day is setting up but this important topic to date has not been part of our formal training.  That is soon to change.

Here is a quick preview of the day’s trading setup based on price action from this AM and the prior two trading days.  On Thursday we had a powerful bounce from the 81 level on the SPYs.  On Friday we saw powerful selling right at the close and the SPYs traded down to 82.36 in the after hours.  Today we saw a gap down in the Premarket below Thursday’s low as well as the 80.50 support from the past couple of weeks.

There was mounting evidence that the 80.50 support would not hold when the market opened and we could see significant downside follow through.  Those who were long the market because of Thursday’s powerful bounce were out of the money by today’s premarket.  Anyone who was long the market above the prior months’ support of 80.50 were in jeopardy as well.  If we didn’t see a powerful up move through the 81 SPY level there would be many participants looking to exit the market.

As I’ve mentioned in some of my recent posts your entry point is key for the best short trades.  So as we watched the SPYs trade down in the premarket to 79.70 we talked about some safe entry points on the short side.  The premarket had offered some support around 80.40 and 80.60.  Both levels were right around the longer term support of 80.50.  Also, they would allow for some initial buying right as the market opened.

My trading plan was to look for resistance at 80.40 to establish a small short position.  If 80.40 offered little resistance I would look to short at 80.60.  I would maintain my short bias unless the SPYs could show me a powerful up move through 81.  My initial downside target was around 79.70 which showed some premarket support.  But what I really wanted was an option on a short position that could potentially be an historic downside trading day.  Ultimately, it ended up being a range day that offered a multitude of quick fading opportunities.

Recap: Under multiple time frames those who were long the market were in a defensive posture as the market opened this morning.  The trade that offered the best risk/reward was a fade of the market as it traded up to recent support.  If you don’t trade the market then you would look to either fade stocks that were opening below recent support or aggressively short once the market failed to have a powerful up move in the first 20 minutes.