Anatomy of a Day Trade

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We came into today's session knowing what to expect in light of the overnight action in the futures market.  On Sunday night, the $ES got off on a bullish note, registering a new recovery high, albeit tepid by all measures.  It then proceeded to drop 100 points before embarking on a protracted consolidation that concluded only minutes ahead of Monday's opening bell.  The pattern was unmistakable, and it foreboded further downside in the coming.

I don't want my choice of words to paint a gloomy picture: I'm simply describing the bearish setup that led us today to open not just one, but two separate day-trade positions in the form of $SPY same-day-expiring credit call spreads.  At the open, we sold the first credit call spread upon recognizing the completion of the countertrend A-B-C (chart 1), and then we bought it back at a hefty discount (due to premium erosion) once the $ES came within a striking distance of the 2020 developing VAL (chart 2).  But the ensuing countertrend rally offered yet another shorting opportunity upon simultaneously back-testing the neckline and retracing 50% of yellow wave 1 of red wave 3 (chart 3).  The next drop should be more intense: should it not materialize today, expect tomorrow's session to occur on a down-gap note.  But tomorrow's business is tomorrow's business. 

Should the forecast unfold as depicted in chart 3, several day- and swing-trade opportunities should present themselves in the coming days.  But what to make of today's volatility?  As far as the $VIX, contango is the normal state of affairs.  But today's discrepancy between the $VIX (spot) and $VXX (futures) is a clear indication of backwardation.  This is consistent with my short-term bearish view (a few days) calling for the S&P 500 to drop to 2600.  Eventually, the time will come for the normal state of affairs to be restored (contango), and so will the opportunity to fade volatility. 

Chart 1: pre-market pattern

Chart 2: midday pattern

Chart 3: volatility


Trade vigilantly,


Peter Ghostine (@peterghostine)

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