Different Strokes

I just want to applaud Dss for her great post on Friday last. She has identified a bunch of resources which are common sense, easily used, and forceful allies.

What I’d like to do is complement that post with this one, which will give a different viewpoint and action option, depending on your time framework, and risk appetite.

First, a repeat of Dss’ SPY chart:




As you can see, she’s drawn a line from the high on April 30 to the high on May 31, and to where it intersects the price action on the current rally. She said she uses price action for her trade, so I’m interpreting that to mean that her line has identified a downtrend, and the price action would dictate a short is appropriate to follow the market trend downwards.

Here’s my SPY chart, and I’ll show you my price action.




At black line (1), the SPY established an upchannel. The price action violated that upchannel at (2).The next day, after (2), the stochastic %K crossed over the %D with conviction (some space between the lines), indicating the price action downward was confirmed. I might enter a short position at that time.

(The downchannle lines are drawn by TDAmeritrade’s StragegyDesk, and the width of the channel’s math is proprietary, but believe me, it does a good job).

At line (3), the downward price action violated the limits of the downchannel. I might have moved out of my short at that time, or perhaps reduced the short position.
But take a look at the day after (3), and you’ll see the stochs going horizontal. This means there’s no price confirmation. Not surprisingly, the volume on that day is quite low, indicating no participation in the channel violation. With no volume follow-through, I’m out. I won’t take chances when other folks aren’t participating.

At (4), we had 3 days of horizontal price action, then we see an upchannel trend was established. I might have entered a long position, but I wouldh’t have added to the entry because at (5) we had a dramatic channel violation to the downside. In the morning, I would have exited my long entry position (often I enter a position with 25 shares, and add as I see W’s on the 15 minute chart). At (5), there was significant volume, and the day after (5) was pretty good volume, so I would have re-entered a short position at that time.

At (6) we violated the downchannel again, and I would have exited the short position at that time. Take a look at the difference in slope of the stochastics at (6) compared to (1). Do you see a significant commitment difference? The slope is much more positive at (1). I might have waited until I saw more commitment by volume or price action, which became obvious at 2 days after (7), where I would have started a long position. I have held that long position long until now, when I see the stochastics are overbought (higher that 80%) and will be reducing my long positions until I see some volume commitment in the next day or two.

Your exercise: do the math. If you started short where Dss started her line, and stayed short until the line was violated, would you have made more or less money than I, hopping in and out, using the thinner price channels and violations?