Pressure building for the DOW!

OK on the DOW, we had a bounce off the up trending support line on Friday and today. Now with the large gain today we are fast approaching the less angled line of resistance. We are still being squeezed into this Rising Wedge pattern. It is a Bearish sign and with the worst months typically coming up I would hold trades until confirmation of a direction. A break above 11,450 and maintaining there. Or a break below 11,225 and staying there, which is more likely since this is a bearish pattern.

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DOW is stuck?

So it appears that the DOW has hit resistance at 11,400. This is significant.

If it continues down and then rebounds again somewhere just below 11,200 we are still stuck in the rising wedge. The next rebound will be critical. If the markets can gain enough momentum to break through support of 11400 to 11450 and stay there we will break the rising wedge pattern if not look out below!

The same goes for the S&P 500.

The NASDAQ seems to be doing its own thing. Hitting resistance at 2170.

Keep your trades small, tight and quick, until the market truley finds a direction.

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Beware the BEAR

OK I know everyone is gung ho about the last few days with the news that has come out and offically we are in a good upswing possibly a bull trend coming. I mean three days of gains how good is that and rare!

I am going to have to disagree and here is why…

The Bearish Rising Wedge Pattern that is forming on the S&P 500 and on the DOW.

Check out the DOW here -

Charts provided by Big Charts

OK notice the resistance line I have drawn and its angle. Also notice the support line and its angle. It is forming a wedge which increases the pressure of the price of the index. This also comes after a sharp downward bear trend from the highs in May to the low in June. This is known as a continuation wedge bearish. Now it has not fully formed yet, however we are also experiencing a reduction in volume over the same time that this pattern is forming (of course we are, it is summer) which confirms the bear wedge formation. So I am waiting until this pattern is broken before trading and if the pattern fully forms and it breaks to the downside we will be bearish for as long as it took the wedge to form. In this case two months!

Now to avoid this pattern the DOW needs to break and close above 11,450 and stay there for a couple of days.

So right now I am waiting, doing small trades with quick turn arounds. No conservative credit spread trading here yet. I am going to wait to see what happens with this pattern.

To learn more about the Rising Wedge try Trending 123 for more information.

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Question from the audience

Rapheal says:
one of the credit spread strategy from optionetics is to find those stock with volume spike. the IV will shoot up and then we wait for it to come down and the put the trade. (of course we need to look at its earning, market…)what do you think of it?
if i use your method, how do i find those stock? would you mind to share your “record” by using this method?
thank you

Rapheal,

The Optionetics strategy is a good one. The only caveat I see to that type of trade is that many times the IV was already peaked before the volume spike and is coming down that day. But it still is a good strategy as you are using the time value of the options to make money.

Finding stocks is through research and building a watchlist. If you want a quick start you can check out my HOT List on the Squidoo page or go to Channeling Stocks to find out stocks that are channeling (have a good support resistance pattern), but there are many other ways of finding stocks. It took me four years to build the entire watchlist that I have right now.

My record using this strategy - I do not keep a running record on this site for good reasons. Personally I think it is tacky and many times not believeable for a website to show a running record, because as the person who puts everything on this site I can put whatever I want. For example my real statistics for the last 13 trades - 10 winners, 2 losers, 1 break even. The losers and the break even were closed early as they broke a support or resistance line. The two losers were not 100% losses because I did this. In hind site, the break even and one of the losses would have still profitted, the other loss would have been a total loss. However what was before that? Did I lose my shirt? Are those my real trade statistics from this last couple of months or maybe those are my statistics from the last four years I only made 13 trades? There is no way to tell…So for me it is not really important for me and can be detrimental to produce an ongoing record on this site even if it is a great record. But to answer your question looking at the last 13 trades is pretty much my success rate using this method. And you can see by the trades that I do put up here occasionally as they happen I do have a good success rate with those.

The problem with this trading strategy is the losses. You definitely need to curb those quickly because if they get away from you one trade can reduce your percentage gain by a great deal. Realize that the profit we get is small in comparisson to the loss that can be had if we make a mistake using this method. Which is why I will be teaching another method of credit spread trading soon. It is always good to have multiple strategies in your toolbox. This strategy is very conservative in that it has a high winning percentage. The next type of conservative credit spread will be that it has a high conservation of capital…meaning the percentage gain is higher so if you make a mistake a loss takes less of a bite in your capital.

This is a teaching site not really a follow my trades site. I will put trades up occasionally as they happen and I always like to put up my mistakes so all of you can learn from them. My goal is to teach how to trade and if you can learn then great. One thing I suggest for all trading is that you do some paper trading prior to actually putting money into the market. So that you at least get the feel for the trading strategy before you truly implement it.

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