Discipline is the key to not get caught in the whipsaw!

THE OUTLOOK & TRADING PLAN FOR TOMORROW, FRIDAY, 05/04:

In spite of the wild intraday swings, there is really no clear change in the market’s directionlessness. As forecast last night, “The medium term outlook is still not outright bearish, although no bullish sign in sight until above 2680. The market is still in a narrow, range bound, short term action mode.” - still applies to tomorrow’s forecast.   

This is what you read in last night’s forecast - reproducing here as it is still relevant for tomorrow’s levels:

"Aggressive, professional, or medium frequency traders who followed the forecast would be short below 2635. Expect strong support around the now familiar 2610-2616 range (from the last profitable short trade just this week). The models point to two alternative strategies here - one of them to be chosen based on your trading style and risk appetite:

(i) take the profits straight around 2620/2615 (again, the exact level depends on your trading style/risk appetite), OR

(ii) wait to see if a bounce off of 2610-2616 would occur and, then take the profits as fast as you can (probably it would be around 2625 by the time you confirm and react).

• If no bounce, and if 2610 is breached, then adjust your stops to within 2615-2610 and let the profits ride till the stop takes it out.”

Again, as another happy coincidence (theory says - and, I believe it - that a model's being accurate a few times in a row does NOT make the model accurate all the time - we still need to be careful and not blindly go by the models alone), the models have it nailed, again!! S&P 500 did break through the 2610 level..all the way to 2694.62 before rebounding back above 2600, and above the 2610-15 level...to close all the way above at 2629.73!! All this action, but just 0.23% movement! That is what we call a whipsaw!

Performance Note: Those who followed the models would have closed out the short for another handsome profit this week! Those who still lost money on the trade should honestly evaluate their trading discipline, as advised just a couple of days back in the light of another pinpoint trade. Both groups should use this as yet another learning opportunity to reinforce good habits and (try to) curtail bad ones.

My short term models are currently sporting a bearish bias, but NO positional bias considering that tomorrow is the First Friday of the month (NFP) and the whipsaws can be wild. If you must trade (somebody putting a gun to your head or obsessive/compulsive, or professional medium frequency traders), trade only on the short side, that too only if below 2610, and use tight stop losses. No long bias until above 2655. Stay flat between 2655-2610.

Medium to long term investors/traders got the short signal with the daily close below 2635, but the market action warrants caution. If already short, use stop losses at 2645 to cut losses on potential spikes up. If no positions, safe to avoid new positions into the weekend.

Worth reiterating on this NFP (Non Farm Payrolls) Friday: Lost potential profits of a trade not taken are always sweeter than the sting of real losses of a trade taken in haste. Be sweet to yourself, stay safe, don’t trade in haste in this choppy market.  

MARKET ACTION TODAY - THURSDAY, 05/03 - THE GIST:

SPX opened the session lower carrying forward yesterday’s post-Fed pessimism. This bearish momentum was further fueled by uncertainty around U.S. - China trade negotiations (read our “horror movie” analogy last night?) coupled with disappointing results by Financials and Healthcare companies.

The index suffered a major technical damage as the index fell below 200 DMA - third time in the last month or so, reaching the day’s low at 2,594.62. Then, the index bounced back from the key support level of 200 DMA into a positive territory for a brief moment. After trading in a wide range and recovering from a loss of 1.56%, the index ended the volatile day at 2,629.73, losing just 0.23%.

MARKET ACTION TODAY - THURSDAY, 05/03 - THE DETAILS:

Trade war concern was the prime market driver during the first half of the trading session as the initial U.S. – China trade talks indicated that a breakthrough is unlikely. The 10-year Treasury yield fell to 2.95% weighing down on the Financials sector which was further fueled by disappointing results reported by American International Group Inc.

The market also reacted negatively to Tesla Inc. CEO Elon Musk’s response to analyst queries regarding the company’s financials calling them “Boring, bonehead questions”. Cardinal Health Inc. was the worst performer in the index, losing 21.42% after missing earnings estimates. The VIX (CBOE Volatility Index) reached its day’s high at 18.66 but still remained below its long-term average of 20.

Mixed economic data did little to inspire the market today. U.S. trade deficits narrowed to a two years low and the initial weekly jobless claims were below expectations. ISM non-manufacturing PMI was weaker-than-expected and productivity gains were lukewarm in the first quarter.

Tomorrow’s Non Farm Payrolls numbers may help the market break out of the narrow range in either direction in a decisive manner. If not, we can expect the range trading to continue into the next week.

IMPORTANT NOTICES & DISCLAIMERS – READ CAREFULLY:

(i)      This article contains personal opinions of the author and is NOT representative of any organization(s) he may be affiliated with. This article is solely intended for informational and educational purposes only. It is NOT any specific advice or recommendation or solicitation to purchase or sell or cause any transaction in any specific investment instruments at any specific price levels, but it is a generic analysis of the instruments mentioned.

(ii)     Do NOT make your financial investment or trading decisions based on this article; anyone doing so shall do so solely at their own risk. The author will NOT be responsible for any losses or loss of potential gains arising from any investments/trades made based on the opinions, forecasts or other information contained in this article.

(iii)    Risk Warning: Investing, trading in S&P 500 Index – spot, futures, or options or in any other synthetic form – or its component stocks carries inherent risk of loss. Trading in leveraged instruments such as futures carries much higher risk of significant losses and you may lose more than you invested in them. Carefully consider your individual financial situation and investment objectives before investing in any financial instruments. If you are not a professional trader, consult a professional investment advisor before making your investment decisions.

(iv)     Past performance: This article may contain references to past performance of hypothetical trades or past forecasts, which should NOT be taken as any representation or promise or guarantee of potential future profits. Past performance is not indicative of future performance.

(v)      The author makes no representations whatsoever and assumes no responsibility as to the suitability, accuracy, completeness or validity of the information or the forecasts provided.

(vi)     All opinions expressed herein are subject to change at any time, without any notice to anyone.