The Dow Looks Like It’s Setting Up Here

This melt up has crucified bears so far, volatility has been crushed. A strategy to get on board the long side without chasing.

“Hey, good evening, do you know what’s caught my eye today, the Dow, not because it’s been up a lot or down a lot or volatile, just because of the nature of this daily chart.  Let’s look at the daily chart, what is actually happening at the moment?  Well you know what, Brexit came out, we had a dive down, we just didn’t… bears got their teeth stuck into it for literally two days, that was it, rallied back up and now we’re at fresh eyes.  So where’s the trade from this? 

Well you know what, over the weekend we had Turkey potential military coup, we’ve had all sorts of bad news coming into the market over the month and we’re at all time highs.  So what is it going to take to smash this market down, I don’t know, we’ve got earning season coming up next week, we’ve got the Fed, we’ve got all sorts of things but barring any really unusual catalyst to the downside I can see this market just chugging up, melting up over summer.  So you know, where’s the trade in that?  Well let’s have a look.  Well on our daily chart we’re just chugging up higher, I don’t like to chase things, I don’t want to get caught in a pullback, if we start buying here, okay, if you bought the highs recently you’ll be absolutely fine but the time you buy the highs is the time that it’s going to pull back for two or three days, I don’t want to be involved in that.  So what I want to do with this Dow, there’s plenty of other markets out there to trade but let’s wait for this one to set up. 

Look at a 15 minute chart, let’s sort the price scale out.  Okay, we’re in an absolutely textbook bull flag scenario, we’ve been flagging for a long time but volume is dying up, range is dying down, we’re waiting for Fed, we’re waiting for things, you know, nothing much is going on and that seems to like acceptance, you’re accepting this level, bears are no longer battling.  The guys on the funds who are making all that money from Brexit are probably long gone or they’ve definitely trimmed some of their short positions.  I’ll do a check of that and I’ll stick up one of the videos later in the week and find out what’s going on there but ultimately, you know, bears are licking their wounds now and you can understand why, you know, they had the best possible scenario to start a roll over and it just didn’t happen, specifically over in the US.  Other markets are a little bit different, we’ll talk about those maybe tomorrow, but look at this US trade, let’s try and get a trade from this. 

I tell you what is interesting right, we all know about the range break fake trade which could happen on a 15 minute timeframe, we draw the line at the bottom and top of the range and we take a trade as we break to the downside of the range, fail and come back up, and that’s nice because you can quantify the risk.  Yeah, you come back down, you come through, you fail, you come back up, whenever that may be, and then you take your long here, you’re looking for new highs here and your stop is there, that’s nice, that’s a good way to play it.  One more way to play this, let me take the screen pen off, one more way to play it which actually is statistically profitable and I like things like that, statistically profitable trades are good in my eyes.  Let’s zoom in so we can see exactly what is going on here.  Let’s put a five-period moving average, not very often I put things like that in but let’s put it in, okay, five-period moving average. 

Now statistics show that if you have six or more closes above a five-period moving average it’s showing you that there is distinct imbalance in the market.  Okay, that’s what a five-period is, it’s a very very very quick moving average and it’s showing you every time you close above it, if you get six or seven in a row that’s a strong market, there’s a big imbalance there.  So what’s the trade setup, the trade setup is you buy on the first close below the moving average, the bells just gone now, it’s nine o’clock so we’re not closing below it today, so maybe tomorrow, maybe the day after, maybe the day after that, it doesn’t matter, this trade is now activated, we’re just ready for the trigger which is a close below.  So the first close you get below the moving average you buy, and then the next time the market closes above the moving average you sell.  Now where do you put your stop loss on this trade, well on the back testing, statistical back testing no stop losses used, but you know you don’t want to have open ended risk on this. 

So if you can finesse it intraday maybe set an alert under that five-period moving average, if it crosses under maybe it’s time to look for a double bottom intraday maybe it’s time to see exactly how it’s going to play out and try and manage the risk based on that.  Maybe there’s a wick but it still closes under so it’s still valid and you can use that low, prior low to take the trade as a stop position.  So that’s what I’m going to be looking out for, it’s a nice easy one to put an alert for, it requires looking at the end of the day to say yes it’s activated, we’ve closed underneath it, now I’m going to look for my long and then you can play it the next day or you can take it just on the open and then manage it like that, so that’s what I’m going to have from the Dow, let’s see what happens over the next few days.”