The conditions have now triggered that whatever happens in the next swings of SPX it’s going to fill a valid sell signal and inside the context of how this sell signal is forming it is going to make sense to bet on substantial drops off this signal. A crash signal is almost certainly going to form - but it hasn’t formed yet.
Here’s a good rule to remember for breaks. It will stand true in the majority of them. When a break is made it will be obvious. Everyone will be know it’s a break. Even those who are contrarian will accept it looks like a break but maybe fade it because fading what makes sense can often make sense.
Everyone should know something sketchy has happened but then the market should do something else for long enough to make everyone forget what they once knew.
The traps are usually a mixture of range, time and sharp rallies. These traps turn into capitulation selling and betting into the latter end of where these trap usually go is where the optimal crash bets are. As things stand, we form a good signal for that whatever happens next and we can prepare for the two possible signals.
Signal one is the market downtrends low and then comes back to retest the area we are at now from a bounce somewhere close to 4200.
The next signal is the market goes higher and comes down off the 4400 area.
In both of these types of setups there will be a period of time while price is trading high in what we’d think if the end of the bull trap where we could make bets on big bear moves and also have a small window in which we could be wrong and be able to cut losing trades quick but have potential of huge winners.
In terms of odds, if the first signal forms the odds of a bigger drop are high. This would be what I’d consider the higher probability of the two signals. It would come from yet another good break and we’d be shorting a retest of 4300 which has held monthly SR levels many times over the last years.
The rally one is the one I currently think it’s more likely we’re in. It is my preferred one. Shorting at 4400 is better than shorting at 4300 and also I can far better define my entry/stops into this type of setup. One concern with this setup is a rally here might turn into a low. If my intended sell area broke I’d be quick to ditch a bearish thesis.
Let’s get into the logic underlying this analysis and how we can go about practical planning of trades.
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