S&P500 (SPX) futures are up nearly 1% Monday evening signaling a strong cash open Tuesday morning barring a dramatic reversal. This rally in the futures, again assuming most of the gains are held, will result in a pretty decent sized gap up in SPY and likely many other trader favorite stocks like GOOG, AAPL, NFLX, GS, TSLA, among others. The key with an overnight move like this is to come up with primary and secondary set ups, something I will explain in further detail in a moment. If you just approach a big move with a “this has to go higher” or “there’s no way this gap can hold” you are bound to get burned. That approach might work tomorrow but it will trick you into developing the exact habits you need to avoid to have consistent success trading.
My approach to tomorrow is simple, I have a primary set up (based on how I would view the market if it weren’t gapping above key resistance) and a secondary set up (based on how I view the market assuming it gaps over key resistance).
My primary set up is as an over/under 1,640 set up on the S&P500 where the over translates to a long bias and the under translates to a short bias. Why 1,640? Because I deemed that as key support since it where SPX bounced off on Wednesday 8/21 after the FOMC minutes were released and then 2 days later SPX rallied to 1,669 (1.76%). If SPX moves above 1,640 I am targeting a retest of 1,646 (the intraday high from last Tuesday and Thursday) with 1,650 being in play above that. Below 1,640 and I’m expecting continued pressure in the high 1,620′s, an area that was tested Tuesday, Wednesday, and Thursday of last week. Below 1,627-1629 and a 1,620 test is a magnet with 1,600 in play below that.
My secondary set up is an over/under 1,649 set up. Why 1,649? Because that is pretty much the midpoint of last weeks range. I like how that works out too because 1,650 seems like too obvious of a level to focus on, 1,649 is a little more precise and supported with reasoning (a key midpoint from a volatile week). Above 1,649 and I’m targeting a test of 1,655-1,660 with 1,670 in play above there. Below 1,649 and I’d expect a retest of 1,640 to see if that level can now once again act as support.
I don’t care about Syria, I don’t care about gold, I don’t care about oil, I don’t care what type of toilet paper Mr. Obama uses to wipe his bum, I care about risk/reward. Using a simple ‘over/under’ strategy is my personal preference to simplify what it is sure to be a very complicated week of trading. Keep your eye on the VIX too and XLF. The VIX’s midpoint from last week is 15.85 and XLF’s is $19.75. Both of those midpoints also happen to fall pretty perfectly in line with key support (on the VIX) and key resistance (on XLF).
I’ll also be applying the over/under approach to my favorite stocks. For examples of how I’m using this approach on GOOG, TSLA, NFLX, CRM & AAPL, click here.
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