Tools of the Trade

The best short term traders have a multitude of ways to make money. They are able to recognize patterns on the Box, they will take advantage of great technical setups, or they may identify the overall strength/weakness of the market on any given day.

Today I was unable to trade due to a never ending flu. I don’t have access to my trading platform at home so if I want to follow the market it is via CNBC or charts on prophet.net. I saw the futures were opening down this morning so I called the tradedesk to place a stop order for my one overnight position. I knew that today might be a reversal day for the market so I wanted to limit the loss on my small position.

Let me explain. The market has been in an uptrend for about a week. Two of the things that were causing buying in the market was the optimism about the stimulus package and the new financial rescue package. Those who were short the market bought stocks aggressively prior to the weekend. Also, those who believed Geithner would instill confidence in the market with his new bailout plan were getting long stocks.

By this morning the news contained details of the new financial rescue plan and the market wasn’t happy. Once the AM lows were breached shortly after 11:00 o’clock every professional probably had a short bias for the day. The market traded aggressively lower in the afternoon and closed fairly close to its low (in the bottom 15% of its daily range).

I will use today’s market action to assist me in developing my trading plan for tomorrow. If today was the beginning of a multi day downtrend then I will need to identify safe entry points for shorting the market. I will use the following levels in the SPYs as potential places to get short: 82.50, 83.70 and 84.50. If the SPY’s open below 82.50 then I will look for resistance at that level and short the market if it fails to hold above 82.50. If the SPYs open above yesterday’s low then I will look for resistance at the 83.70 level. If a bid fails to hold above this level I will short the market with an initial downside target of 82.50.

After the 11:30 down leg in the market the SPYs never traded above 84.50. If the market bounces tomorrow I will look at 84.50 as a potential failure level. I really like the risk/reward there. I will risk 10 to 15 cents short the SPYs with potential downside to 82.50. In the event the market moves aggressively below 82.50 the next major support is at 80.50.

On the flip side if the market can hold above 84.50 for more than a few minutes I will look for an upmove to 85.50. I will also talk to the traders on the desk about any unusual buying or selling they noticed at specific inflection points.