The probabilities of the current area we trade at in major indices being important as trend decision points is very high. Most of the time when markets get to these spots, a big decision is made. We’re at this kind of spot in a move that’s taken 18 months to form. A really big decision “Should be” due to be made.
If the market is in a classic bull trap, we’d be somewhere inside of the last 1/5 of it. High perhaps in, but if not there just being some nominal spike outs to come (Often from false starts on bear moves). We’d be somewhere near the price high. Depending on how tricky things are that could form sooner or later.
Let’s look at a historical example. Imagine when the Nasdaq made its first low and bounce in the dotcom crash you were 100% sure the top would come somewhere in the highlighted zone
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Even in this idealised scenario where you know a small range what is probably going to happen is you see the selling start. Build up shorts. Become sure the big break is coming and then the second spike comes. You then think the high is broken and it will go higher in the zone. Literally, you can know the price and get the trade wrong.
That’s an ideal scenario. The truth is you’d have to have considered all of this as the risk zone and all you’d know was it hurt a lot when you were wrong and it ripped.
Applying this to our current situation using retracement norms we can say 76 would usually reverse around the 76 fib, but it can be a little before and it can spike out a little so we need a small zone. And if we’re 100% correct about that, unfortunately there are many possible snide spike possibilities.
All of these lines end lower - but some of these lines are incredibly hard to effectively take a high RR short position and some would be terrible if you took a good initial short position but added to it and failed to hedge before spike outs.
Looking at Nasdaq in 2008 we can see another way in which a bull trap ending can be complicated to short. This having a spike out and then going sideways for weeks. During this time many bears probably got exhausted and did not want to follow the real break.
If we were early in that, we’d be du ea move something like this.
Another spike up. Runs the high. Does not retrace. Then it chops high to low in a range for a month (And it could be multiple months given our monthly chart and time of moves so far) and then the selling starts. Which would be exasperating if not prepared for.
Here’s Japan, this was the final false hope move for bulls before this went into a multiple decade downtrend.
This was a far friendlier move to be trying to short the general zone in which it reversed but even this came with a rally to retest the high.
My experience of trading reversals from 76s (Which the examples we’ve looked at have not all been, they’ve been shallower but as I mentioned in a previous post bulls traps have tended to get deeper to 76s in current times) the most likely outcome is something like Nasdaq 2008.
We have the first move into the resistance zone in. We’re forming a price action based bear trap. We’ll spike this out in a fast consistent move and then head into a range. Having been in this spot 1,000s of times on smaller timeframes, I know this is what I see most often when a 76 reversal plays out.
Usually here we’d not be less than 6-8 candles away from getting into the time of a real reversal. So we’d maybe be looking at a relatively flat month or so overall here.
It’s really hard to know what short term moves will be in spots like this. Those professing to may be overly confident (Or just far smarter than I) because the reality of it is bull traps can come in a few different ways when we get to action end of things (And of course we don’t even know if it is a bull trap yet).
Really easy to know what to do here on a big chart basis. Really clear cut on big decisions to be made but the fie details are something I am concerned with. I can put out a well worded post, some general zones and then claim it as a win if in 8 months the chart looks good - but the purpose of this is to provide practical trading strategies.
Calling it and trading it can be very different things.
Swing bears I think should be patient with anything that punishes you on time. Shorting call spreads has a far better chance of success than long puts. If long puts, it’s probably best to use spreads to at least offset theta and vol crush. I feel the put buyers risk look like this (And this looks ugly).
There’s a lot of value to day trading shorts while supports are breaking. But as soon as this fails, it’s time to bail. I think 4500 general area is more likely for a real top. Mostly based on the fact it just seems too easy if it comes from here. Markets rarely op sharply. They move to high zones fast and then top slowly.
Bear trade is good while it has momentum, but I think that might run out. Now or later. Above 4380 it’s better to wait. My short term bias leans more towards long for now (We may close the week down) but on a swing basis I am very interested in building up my shorts now.
But I’ve learned patience is usually a virtue. Need to give time for the bears to over forecast/position and then there be a spike. For bulls to get comfy because the retracements hold in a range. Generally, it takes a while of the market trading at the same price to bring complacency fully in and shake bears fully out.
Trend is trend - if the market keeps breaking lows and rips stay inside of local 76 fibs, keep shorting. But keep the spike out in mind, you do not get a lot of time to react to the switch in momentum when it comes if there’s a final run to the high and you did not prep for where your bear exit was.
I think if we’re in the 4/5 of the bull trap, we’re going to see a high somewhere around 4530 and we’re going to see selling sometime around august and heading into Q4. With the caveats of me not being very good at specific timing I feel all of these would make a lot of sense in context of a typical bull trap.
Little higher. Little longer. Low hanging bull gains for swing traders is passed. Bears who are not patient will usually wish they were.
Often here, the next big market swing is pretty easy. Be it bull or bear, once the decision is made the next move is easy. The most important thing at this point in time is not to deplete your ability of willingness to act decisively when the cleaner ops come.