F**k your puts, statistical distribution & monthly close, Thursday's Trading Plan
He's back, buckle up nerds
Ladies and gentlemen, he’s back! Stronger than ever, our friend Powell did it again. I have no idea of he said, but we sure know how the market interpreted it.
Yesterday, I wrote :
So, why am I happy that we closed below 11,528?
Because if the market was really weak, we had plenty of time to go much lower than 11,465. We could easily have gone 1-2% below that key level. But we didn’t. I’m also not too much concerned if the market keeps bleeding overnight. We’re sitting at the low of the range, and the news is coming tomorrow.
It always looks scary to buy at the low of the range, but the reality is that it offers great risk-reward. As usual, hindsight analysis wins.
Let’s review what we discussed earlier this week with that extract from Monday’s letter:
“My favorite scenario for the rest of the week is to keep grinding down below the current daily range (11,528) and then a violent move to 12,000+. We also need to remember that the tail’s risk is real; below 11,528, there are not many fresh supports.”
Today’s low was 11,498
Today’s high was 12,086
We also mentioned a fakeout being highly likely for the first level that would be touched between 11,528 and 12,140. I rarely am synchronized like this with the market. Writing this daily letter helps me a lot in my daily trading. It doesn’t replace my personal trading plan, which I don’t share in here, but it’s a good complementary approach.
So now, what can we expect for the next few days?
Yes, let’s be real here. No one knows. At best, we can take an educated guess and follow a consistent framework.
Today’s action has been “pretty boring.” Barely any overnight action, a very tight 30min OR, and then a good old green dildo.
The action within the OR was pretty clean, though. A false breakout of the infamous 11,528 level with an increased volume at 12:20 pm. After that, the 1:30 pm candle signed the end for the bears. It broke the 30min OR and never offered a second chance for an entry. The light pullback stopped at the weekly VWAP, and the second leg up stopped at the AVWAP from November 10, 2022. After that, it was a long and painful grind up for the bears. Of course, in days like this, if you’re wrongly positioned and don’t have a stop loss, you blow your account. It happened to many countless times. That’s why, even if you don’t trade news, you must be aware of them. That’s also why you never short the bottom of the range. Please repeat after me. Unless you have a quantified edge, never short the bottom of the range.
Before talking about what can happen next, let’s keep in mind that today we closed the monthly candlestick.
Two green monthly candlesticks in a row. First time of the year; it was about time. Funny how quickly the year went by. Also funny that between April 2020 and December 2021 (21 months), we only had one occurrence of two consecutive red months. The only target that matters on this HTF is 13,740. Prices could easily range between 10,000 and 14,000 for a year with lots of fakeouts, volatility drops, and boring days.
Now that this has been discussed, let’s see the fun stuff. What happens after a +4.4% green day?
I could do it manually, but it has been a long year, so I’ll ask @Alfred, my best friend.
Since 2000, we have had 173 days with a return greater than 3%. That’s about 3.1% of the time. Not too frequent, but also enough to draw some conclusions about it.
Let’s do a little exercise. Before reading what comes next, guess what’s the average return following a 3%+ day.
“Torture the data, and it will confess to anything.” I love this quote so much. We can clearly see that the expected return following a day like today is positive over 173 occurrences. The tail risk is on the left, but there is only one occurrence (I guess that’s why it’s called “tail” risk).
So… what’s the average return following a day like today?
Stop guessing. Start building.
Let’s not forget some big news coming in until the end of the week.
12,249 and 12,450 are the next two big resistance (for me). Since we broke with strength out of our two-week range, I want to see continuation going into the rest of the week. 12,450 is not out of the equation by Friday.
Start building! I shared over 70 articles this year, with lots of Python stuff posted here and there. It will save you valuable time and provide you with more accurate insights.
Thank you.
- Retail
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