Turmoil over recent Trump controversies triggers the Dow’s biggest loss since September — Washington Post

Against all statements of analysts saying the market has developed an insensibility against the turmoil in Washington, the market took a nose dive last Wednesday. The E-mini S&P 500 Index dropped an approximate 42 points throughout the day. While many take a step back and discuss the possibility of a next recession, we as momentum traders deliberately analyze the price movements and join trends day after day.

Plan

When reviewing similar price changes from the past, we notice that the S&P500 usually bounces rather well after such tremendous weakness. Hence, it is reasonable to join a long trend on an ETF such as XIV once unmistakably established.

As ETFs track a collection of assets, it is even more important than elsewhere, only to join a trend. For that reason, we can also long an ETF on a gap up whereas we usually only take long positions on a gap down.

XIV - Three Month Chart

As ETFs track a collection of assets, it is even more important than elsewhere, only to join a trend. For that reason, we can also long an ETF on a gap up whereas we usually only take long positions on a gap down.

Trade

In order to avoid getting trapped in a wrong trend, we first let the chart develop a clear picture within the first five minutes of the trading day. Once the chart breaks out over the high of the first five minutes, we can enter a trade on a starting position with an educated risk at the low of the day.

Although we usually let an entire starting position ride until an obvious resistance level, we took some off into the parabolic rally right under the $70.00 whole dollar mark as parabolic price changes are often met with equally strong corrections.

XIV - One Minute Chart

After locking in some profits, trading is rather simple: Be on the lookout for any low-risk opportunity to add into and wait until a significant trend change to exit the position.

After the parabolic rally, the chart settled over/under VWAP and traded in sort of a wedge for about 15 minutes. This wedge not only gave us a higher exit spot at the low of the wedge but also a great price level to add into. Fortunately, the S&P500 decided to push and so did XIV. The moment the chart broke out of the wedge, we were able to add to our position with a risk:reward ratio of 1:2 to 1:3.

As our least target with the increased size is the previous high, we patiently waited until we broke out above it in order to subsequently sell a portion of our position into a first red candle. At 10:26 AM the chart put in a low after breaking the previous high. Shortly after, XIV fails to show any follow through momentum at this price level, giving us a perfect spot to exit our position.

Because we are only interested in a long position, the chart gives us no incentive to start another long position until it is back above VWAP. After hours of building a basing point at the low of the day and red to green price level, XIV continued its long trend and pushes back above VWAP.

As a result, we can once again join the trend on a dip with a starting position and make sure to lock some in along the way the moment we start to notice a whiff of weakness. Unfortunately, after this enormous secondary push through the high of the day, the chart did not develop a clear low until we were almost all the way back down. Consequently, we had to take said deep low as our exit point and shortly after concluded the trade at exactly this price level ($69.69).

Although we usually let an entire starting position ride until an obvious resistance level, we took some off into the parabolic rally right under the $70.00 whole dollar mark as parabolic price changes are often met with equally strong corrections.

Review

Overall, the tremendous profit speaks for the good execution of the trade. It shows patience, focus and last but not least resilience. However, one remark to note is, that the second long position might have come a bit too early. Even though the chart has shown great strength right at VWAP, generally, it is prudent to wait for a confirmation above VWAP before entering a position.