Trading Rules Regarding Falling Knifes and Parabolic Moves

Today's Trading rule of the Day is: "Do not short a parabolic market and do not catch a falling knife." The bloodbath on Netlflix

continued as their Q3 earnings were not high enough to shore up confidence in the stock. One of the rules we follow is to stay away from "falling knife" trades. We would rather give up some opportunity by reducing risk and staying away from trying to pick the tops and bottoms of moves where this is typically extreme volatility. Our focus is to watch the overall market and look for stocks, options and futures that are trending alongside the overall market. While it is exciting to catch the big moves or buy close to the bottom tick, it is highly unlikely to occur over the long run without facing substantial losses. Trading is about probability and risk vs. reward... it is a game where it pays to play the odds. A market that is no stranger to parabolic moves this year includes the metals market. We focused on Gold in our Daily Report from yesterday and mentioned the stop run we saw last week following a period of consolidation. Another market that is forming a similar pattern to gold is the silver market. There is a great article highlighting the consolidation in Silver that we mention in the Daily Report video today. As far as today goes, we saw the overnight move in the ES futures test the 1256 area that we pointed out in yesterday's report, "Three Things to Watch in This Week's Market". The reason this area is so important is that 1256 was the yearly open on the ES. That means as soon as the ES trades above that area, the bulls are in control for the year. We are seeing key areas in this future at 1242, 1230-33 and then down at 1220-22 and 1216. Another market we look at in the video is the NQ futures (Nasdaq). With earnings announcements on most Nasdaq stocks following the closing bell, the NQ futures are a way to see an early indication of the impact that particular stocks earnings have on the overall market.