Week of July 18 – Update

July 17, 2021 | By greg | Filed in: Stocks, Trade Setups.

Good morning everyone and sorry about the lack of updates the past few weeks. It’s been a busy while for me between the various endeavors I have going and a GI bug brought home by the baby again. I haven’t really taken many trades since the RBLX long I shared recently as it was a big win for me. I do have a short SPY trade to share, which although I am already in it, it is a highly probable trade setup that can be used in the future.

The SPY trade I am referring to are some puts that I entered on Thursday near the market close. I didn’t share this trade on here, but I did mention on Twitter that a broadening formation was looking likely. I am not a pattern trader but this is a formation I look for as the underlying price action indicates a new phase of price discovery. As you can see on the chart, SPY started struggling on July 6th and then dropped on the 8th again when it dropped to $427.50. We then rallied to a new high on lower volume and after dropping below previous day’s lows on July 15th, I began to search for an entry to the downside.

SPY hourly chart – as of Friday 7/16 at market close.

Also, looking at the underlying market structure, I have been seeing demand falling for equities for the past couple months. Up until mid-April, the broad sentiment line oscillates about the “5” line, which is normal supply and demand due to fear/greed cycles, re balancing, etc. Into May and up until now, you can see demand has been dropping. While this doesn’t necessarily mean there is a market crash coming, it has preceded every multi-percent pullback in the past. This data really shows what is happening in the underlying market and when coupled with price action you really can get an idea of whats going on and it isn’t good.

Equity demand has really taken a drop starting in May.

So with some lines drawn to convey what I am seeing here, lets plan out this trade. In the morning on July 15th I had determined there is a trade to the short side based on the data I have mentioned so far. I was hoping to get a rally in which I could enter short with some puts and my patience was rewarded at the end of the day when some buyers came in pushing the price up. I purchased my puts when SPY was around $434.50 and went two weeks out on the expo. Friday morning the market gapped up to around $436.30 or so where I added a couple more puts to my position. I was rewarded the rest of the day as the market sold off.

SPY target line at $427.50 area.

I plan on keeping this trade on until the price of SPY hits my target line on the chart above. I will sell these just below the $427.50 low from July 8th. I will not be looking to go long anything until this market sorts itself out, but I will search for some more short side trades to share in the coming weeks.

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