Bit of the old in out, in out
After the outside day, I posted that the odds (not my stupid opinion, but the odds) favored an inside day. Also, because there is a natural cycle of range expansion to range contraction (per Larry Williams), and the well noted effect towards range days AFTER trend days.
Someone asked on the board how I know the odds favored it? Funny story. I was serving a 5 year sentence for torture, kidnapping, GBH, and armed robbery, and rather than get busy every night with Mrs Palm and her 5 sexy daughters, I had people send me letters with charts. Years and years and years of candlestick charts. I spent every night with a pencil and paper looking for edges.
Now this is NOT a very common pattern. 4 times on the $spx in the last 2 years. Its easy to filter for, search for days with HIGHER HIGH AND LOWER LOW than the previous day, but I prefer to look by eye, with pencil and paper.
What I would like people to be alert to is the psychology of the weak hands now in the market. I noted yesterday that after an outside day we have NEW PARTICIPANTS in the market (since both longs and shorts got whipsawed out). What is happening when a NEW PARTICIPANT has a day where nothing happens?
He starts to get nervous! He wanted it to go UP/DOWN and it did not do what he thought it would. Therefore he becomes on high alert for jumping out. That is the psychology behind this trade and its inherent edge.
We have a high probability pattern today, with a small range, meaning small risk.
Now, both Volar and Fearless are bullish here… with good reason. Why would I not take that trade long (inside days are both long and short signals) ? Is that not BIAS? Which I am always screaming about.
No, and let me explain. In this case there is a SPIKE HIGH just above the entry point of the long trade. There is no telling how it will react to this old high, so there is a significant chance of hitting that old high and then rejecting it. If we took the trade long that would mean risking 23 points to gain 4 (with a further chance of the trade continuing) By my reckoning that is a sucker bet.
Put another way…. I have no idea if the resistance just above will hold. I dont want to get long until either the market has cleared the resistance and tipped it’s hand, or from lower down where the odds give me a higher reward for the same risk.
That does NOT mean there is not a significant chance of the market going straight up from here. I rate it as about 30%
I rate the possibility of it going straight down from here in a new leg causing downside capitulation as being also about 30%
I rate the highest probability of about 40% being we attempt to go down, and paint a buy signal from lower down.
With that in mind, what should my profit taking strategy be? I should obviously be more agressive than normal in banking downside profits, unless we have evidence that a new motive leg to the downside is underway.