This morning, QQQQ, SPY and a host of individual stocks opened with what at first appeared to be a prime opportunity to go short, but which rapidly turned into a chance to make a high-percentage long trade. The cue to change directions came from one of our favorite old friends: the OGRe, or Opening Gap Reversal.
In my post yesterday, I talked about the plethora of short setups showing. So what went wrong? Nothing! Setups are not magic crystal balls which always tell us where the market (or an individual stock) is going. They simply help us to judge the probability of a move and (hopefully) give us an edge over pure chance. How we use that probability and whether we make or lose money has everything to do with our Trading Plan (entries/exits, stops, position sizing, etc), not with being “right” all the time.
If you are looking for a way to be right all the time, you should not be trading! Trading is about discipline and money management, and it is entirely possible to make money while being “right” only 30% of the time. It’s also possible to lose money while being “right” 70% of the time.
Good Setups Gone Bad
Good setups can be very powerful. But paradoxically, an even stronger signal often comes from a good setup that fails.
What we got today were failed short setups all around. It’s not that the setups weren’t there. Even Oscar and his OMNI (which is correct so much you’d think he must have drinks with Mr. Dow and Mr. Jones every evening) were pointing down.
What I think happened today is that looking to go short was a little too obvious. There is an old rule that The Market likes to make its moves with as few people on board as possible. On a day like today, the very best way for The Market to shake off the most barnacles (traders) is the old Michael Jordan Head Fake, aka the OGRe.
OGRes are powerful because they catch so many people looking the other way. It can seem counterintuitive at first, but if we learn to watch for them, we can take advantage of these high-probability morning patterns.
Here’s a diagram of what an OGRe looks like on a daily chart:
There’s not a special Japanese Candlestick name for an OGRe, although many notable and powerful candles can start out as OGRes, candles such as the bullish piercing, bullish and bearish engulfing, dark cloud cover and the squirrel on a transformer. Ok, I made that last one up.
Today’s OGRe Example, Brought To You By QQQQ
Many, many individual stocks had similar formations today, so let’s just look at Big Daddy:
The chart never showed a short entry. It gapped down and then ran down farther. Be careful not to be taken in by the panic to get short on a gap-down opening like today. Patience, grasshoppa. Wait for an entry, then when it happens take it and set your initial stop.
If you’re not able to get in and the market goes away for a million points, have a beer, and come back trading tomorrow. As I believe I heard Oscar say on one of his videos, It’s better to be on the sidelines wishing you were in, than to be in and wishing you were on the sidelines. The market will still be here, waiting patiently to reward your calm discipline or punish your fearful impulsiveness.
At 1005, the QQQQ pierced into the Opening Gap, at which point we’d start watching for the first pullback to get long. That pullback happened immediately, and on the 1020 bars’ break of the 1015 bar’s high, we had a spot for an entry into a beautiful daytrade.
Here’s what today’s OGRe looked like on a daily chart:
This bullish piercing candle, which began with the OGRe this morning, may provide an entry for a short-term long entry tomorrow. I say short-term because I don’t believe this rally. Only a confirmed break of the February highs will convince me.
And, lest I be remiss, I must show my dear AAPL:
That, my friends, is a picture-perfect hammer, the break of whose top will provide a great jump-in point for yet another short-term long trade. Alas, not for me. I am sworn, or doomed, to make my money from Apple on the short side.
That’s all for now, ya’ll. I gotta get to bed.