Today’s market looks like a typical “head fake” that you get when the market is stretched a bit. The markets have been up 24 out of 34 days since the end of the 8 percent correction in early February. Days like this can make trading painful but if you anticipate them they can be very good.
The day started strong as the SPX Index (Standard and Poors 500) jumped 6 points in the first three minutes. The SPX then retraced and jumped again another 4 points above the previous intraday high to 1180.6. This looks like a very strong market right? Not so fast because at 1:30 EST the market (SPX) dropped 10 points to 1170.05 and now sits at 1169 at 3:40 pm. This is not a market for inexperienced traders. This is the kind of market that hedge funds and other institutional players use to trap traders. The market is stretched and with earnings season around the corner there are possible head winds awaiting. The big boys are never caught with thier pants down but they still need to make their numbers.
If you take a look at the MACD on a 5 minute chart of the SPY (the ETF that tracks the SPX) you may have seen this coming in time to stop out of any long trades you were holding. If you’re good you might have reversed and shorted the market here as well. At around 12:10 PM the trigger line crossed below the MACD avg and the histogram also turned down. The SPY then reversed and turned up to a new high of the day but the trigger line never crossed back over the MACD line and the histogram never crossed above the zero line to green. This should have kept you out of the long trade (assuming you use the MACD indicator on a 5 minute chart) and possibly kept you in a short trade. Shortly afterwards the SPY turned right back down and crossed back under the zero line. Any traders that shorted the market here made a very nice profit. You can bet some institutional traders had a very good day trading the market while some others..well not so good.
This kind of day will catch even he best traders. Keep your stops tight or stay on the sidelines until there is some real direction again in the market. Check out this article for more on the MACD.