Looking For A Good Trade: SPY

Let's look at SPY, the S&P 500 exchange traded trust. I think we're at a favorable trade location to go either long or short. How can that be? Because to me trading is not about prediction, it's about the reward to risk ratio. Looking at a daily chart of SPY, I see a consolidation range between 126 and 130, which I noted with a blue rectangle. Any trades inside this rectangle in my opinion are guessing when it comes to “trading”. I don't think it is wise to focus on being right in your judgment for the direction of the index, but rather the focus should be on probabilities. I would like to discuss both the short trade and the long trade opportunity, but for today let's look only at the buying opportunity that I see is presenting itself.

Consolidation is an equilibrium that represents a balance between supply and demand. These patterns give good fuel for breakouts.

Every trader who has been bearish or sold since June 6th is going to be wrong on a breakout from this balance area to the upside. Every trader who sold their long position inside this range in hopes of buying lower are now likely to feel as if they are losing money and will probably be itching to get back in before it's too late and have to pay up further. That is an awful feeling to be bullish on an index, and watch it take off without you. Traders who are leveraged with a short position should also be covering to cut their losses as well since with each tick higher the actual P&L starts to go from red to neon red, and the pressure to buy and to close out their losing trade catapults prices even higher. The professionals sense this and pour it on so they can of course take their profits from those who are squeezed and capitulating at higher and higher prices. Then you get to see it reverse after you just bought. The pro's take no prisoners. Has this happened to you? Unfortunately it has been part of the learning process for probably every trader who ever lived and I am not afraid to raise my hand. This is why my entry strategy is now based first on identifying the market condition, and then finding a favorable trade location, otherwise I am doing nothing. There is no guarantee of what is likely to happen, but when it comes to “trading” and probabilities, being on the wrong side of a setup like this one enough times will probably blow up a trading account eventually. If the breakout fizzles, you can...