May 5th, 2023

1. Fundamentals

    - FOMC hawkishness and Regional bank runs have been large fear drivers this week. We created a 30m downtrending channel from the high on monday and we have been hitting upper bounds and selling off a few times.

2. Technical Analysis/Trade Strategy

30d:30m

    - Clean 30m channel continuation there. We have 3 restests of the top bound of trendline and we also were holding and well below the WTD MTD anchored vwap as well as the JWAP (Jerome Powell Anchored Vwap). 

    - I took the short on red arrow and covered for loss on green arrow. I basically just blindly shorted it without trying to see what the market was doing first. Nate brought up a good point that I should really wait to see if there is weakness first before just blindly shorting it. This is hilarious because 2 weeks ago when I realized I love this strategy I just blindly shorted and it worked so well. Every since that day I have lost 5/5 trades in this strategy and a total of about 100 points of MES contracts. That is absurd. 

Why did this trade not work?

Refer to Playbook: Trend Day (tradejournal.co) on the post from May 5.

    - As you can see in this post, we had a clear breaking news catalyst from the day before that was fueling the entire move. AAPL had great earnings reaction. VOLD opened at +8 which is wildly extreme. ADD moved a lot higher off the open. All sectors were moving up massively. The second the market opened and I saw VOLD at 8 I shouldve immediately just closed this position for a very small loss. Instead I held the whole way to max stop which is just silly. We were clearly going to move higher on the day given WAL and PACW recoveries as well as just ridiculously strong bullish moves in all sectors. This trade will not work if I blindly just short the moves with no plan or strategy. I need to see the weakness occur first and when it does make a lower high at the 30m downtrending channel, Then I can look for my entries. I need to remember that this strategy can yield up to 50 points if I do make the trade, I will also have tons of time to add into it if I am going to be correct. When I get 1 win on this strategy with proper size I should be able to knock out all these losses combined. Patience applies to all strategies so why am I neglecting it on this one?

Micro Channel Continuation (MES)

    - Every trade in the market is some form of either continuation or reversal trading. My strategy relies on identifying how likely a continuation is to occur. A top down approach is essential for this strategy so that I can account for Daily trend, 1h/30m trend, and Intraday trend. After identifying the most important trend (macro) then second most important (micro), areas of interest can be identified as potential higher lows (longs) or lower highs (shorts). The essence of this strategy is to capture the holy grail Trend Day. Trend days occur very rarely but the +EV is massively skewed to the side of whoever is following the trend. My goal is to identify these days early on and find out how to take scalps, move to moves, or trades to hold. 

1. The Big Picture (Macro & Micro)

    A. The market is EXTREMELY neutral ever since the start of 2023. Yes, we have moved up signficantly off the lows of 2022 but a ranging market is the only way to describe the current phase we are in. Why is this the case? There is simply too much uncertainty as we move forward to the "recession." As we all know, a true capitulation in the market does not occur if everyone is sitting around and waiting for it to happen. The market only can capitulate when NODOBY is expecting it. You can feel this in the price action of 2023. The market will have big rallies on key data days such as CPI or FOMC, and the very next day we fade that entire move, only to recover it the following day. There is clear lack of understanding the next move even amongst institutional players. Knowing this, we must start a top down approach to the market as to understand where the momentum is. 

    B. Top down approach means breakdown the market into 3 phases: Macro (daily chart), Micro (1h/30m), Intraday (5m). Daily levels are most important, then Micro levels are 2nd, then Intraday levels are 3rd. These 3 timeframes can be in any of the 3 phases that any market will be in; Uptrend, Downtrend, Range. Identify the Channel within each of those scenarios. Channels occur in all trending markets and it is essential to identify the upper, lower, and center, bounds of those channels. When we are uptrending, you go long on the bottomside of the channel and avoid shorting altogether. When we are downtrending, you go short at the upper end of the channel and avoid going long altogether. When we are in ranging markets, the daily matters less (in terms of trend) and the micro timeframe matters much more.

Scenario #1

        Uptrend (Macro & Micro)

Macro: (4/15/2020-12/31/2022) Uptrend

    - As you can see this is from post-covid to the All time highs on the /ES. This is a great example of an uptrending channel on the daily timeframe.

Micro: (12/20/21 - 12/28/21)

    - This is a Micro Uptrend within a Macro Uptrend.

Scenario #1 Analysis: When we have confluence of these 2 types, obviously we are looking for LONG trades. Since we have Macro pushing to highs while Micro is doing the same, we look for continuation trades and reversal trades. They occur in different areas.

Example:

    - Since we have Macro and Micro in confluence to the upside, we look for longs. The best entries to go long at at or near the bottom of the ascending channel. This entry runs the risk of the break of the channel but in terms of probability of winning with a good risk/reward. We will move higher off this zone more often then breaking through it. I do NOT SHORT at all when are are in micro uptrends. Shorting will be extremely difficult and the only places to even think about shorting at at the upper bounds of this ascending channel. Even in that scenario though since we have Macro pushing higher and Micro pushing higher, its extremely difficult to short so instead of trying to go for a bad setup I instead just avoid it altogether. 

Scenario #2

Macro Range & Micro Range

            1. Macro: (11/30/21 - Current Date) Range

    - The current phase of the market is a ranging Macro. 

        2. Micro: (3/13/23 - Current Date) Range

    - The Micro was in an uptrend since 3/15 and we made consistent higher lows and higher highs for a full month. We currently broke that uptrend and are attempting to break back to the downside. Until we make consistent lower highs and lower lows with a defined channel, this is purely a range. We need to confirm lower high and lower low before we consider this a downtrend. 

Scenario #2: Since we have range on both the Macro and Micro, this is EXTREMELY DIFFICULT to trade. In ranging markets there is no trend, and when there is no trend it is hard to identify areas that have enough liquidity that cause strong movements in the underlying asset. It is not uncommon in these scenarios to see large movement one day followed by selloff of that movement the next day. As you can imagine, uncertainty within broader market indices create very troubling times for this style. 

Scenario #3: 

Macro Downtrend & Micro Downtrend

Macro: (11/30/21 - 1/17/23) Downtrend

Micro: (9/9/22 - 10/2/22) Downtrend

Scenario #3 Analysis: This is probably the best version of the 3 scenarios laid out so far. Since fear is stronger than greed, shorting anywhere at or near the top of the descending channel is very viable. Similar to the last 2 scenarios, shorting at the bottom of the descending channel is not good as bounces are more likely. Avoiding the center of the channel is advisable while going long whatsoever is likely to be much more difficult than trying to go short.

Remaining Scenarios: Unlikely to give high +EV trading opportunities

4. Macro Downtrend & Micro Uptrend

5. Macro Uptrend & Micro Downtrend

6. Macro Range & Micro Uptrend

7. Macro Range & Micro Downtrend

8. Macro Downtrend & Micro Range

9. Macro Uptrend & Micro Range

    - All of these scenarios are much more difficult to trade because they contradict one another. How do we trade a micro upchannel when the macro is in a downtrend? vice versa? The answer for me is to always have the macro scenario being the main focal point while "blindly" following the micro trend. In ranging markets, uncertainty is so high that really any move can get faded on any given day for any given reason. Since this is the base case scenario, doing any type of trading is going to be much harder than if we had confluence such as Macro Uptrend & Micro Uptrend. In these scenarios, levels become important areas of liquidity and those levels usually come from the last level of certainty that we had. For example, If CPI day caused a large run up that was sold off the next day, the high and low of the CPI data candle can be strong areas of support or resistance. Similar to a Fed day. 

2. Intraday Fundamentals

      A. Since I am only trading the MES there are clear fundamentals that have been dictating the entire direction of the market. The only problem with these fundmentals is the fact that a lot of these fundamentals are extremely mixed in terms of how the world perceives them. Some of those fundamentals include:

1. CPI

2. Rate Hikes

3. JOLTS Job Numbers

4. Income

5. Spending

6. Regional Banking Crisis

7. Fed Minutes

8. Home Sales

9. GDP

10. Non-Farm Payroll

    - All of these fundamentals have massive impacts on the market and at different times within our lead up to the "recession." Last year obviously, CPI was the huge catalyst within the market and for the first 6 months we would sell off massively everytime a CPI number came out. Eventually the market learned to frontrun the selloffs and now in 2023 we usually spike on CPI numbers. There were points last year where Spending and JOLTS had huge selloffs in the market since they are directly related to CPI. Sometimes its Non-Farm that is the catalyst, sometimes its Fed minutes, sometimes its Home sales. Moral of the story is, economic data and fed psychology has a huge impact on the market and when we get these numbers it is a strong incentive for the market to PICK a direction. Sadly, in 2023 so far we have had very few days where the market gathered the data and actually moved and continued in that direction. Something that is a massive Tell in this market is when something 100% unexpected occurs. When the Regional banking crisis began with SVB, the market had a new fear and new fear means strong selloffs. That was probably the best short opportunity of the year so far because anytime we have a new unpredicted fear occur in the market, its incredible fuel for large moves. This makes perfect sense because if the market is a future prediction vehicle and the future is uncertain but we just got a big reason to indicate that the future might be bad, then we can selloff big time. 

Example: Regional Banking Crisis

    - Silicon Valley Bank collapses

    - Regional banks suffer from the losses

    - Financial Sector suffers losses

    - Although this seems small, this was a massive selloff. This is when my strategy works incredibly well. Capitalizing on the fear of others is when the market is much higher +EV for this strategy. If there is a massive uncertainty driving event then the market will selloff from that event. 

3. Technical Analysis

      A. When identifying potential areas to go long (bottomside of uptrending micro timeframe channel) or short (upperside of downtrending micro timeframe channel) then I look for key intraday fundamentals to confirm or deny my "IF we are at the bottomside of the uptrending micro timeframe channel THEN I will look for longs (or vice versa)." thesis. To do this I will look at key intraday levels and again I will do a top down approach to these. In the example below I will assume we are in a micro uptrend and I am going to look for longs off the bottomside of the micro channel.

    - Before I outline these levels lets reiterate what happened for me to get to this point.

1. Identified the Macro and Micro Timeframe Channels

2. Waited for the retest of either the bottomside of an upchannel (micro uptrend) or the upperside of a downchannel (micro downtrend)

3. 90% of the time we will not have this ontop but perhaps we have an intraday fundamental shift such as a Banking Collapse

4. Now that I can safely assume that a long or short will occur depending on the micro timeframe as my basis, I will go into the intraday technical levels.

In order of importance:

1. Previous day range 

    - Are we above yesterdays high of day? 

2. Previous day close

    - Are we above previous day close

3. Premarket high

    - Did we breakout of PM high early on in the open

4. Opening price    

    - Did we hold above the open price

Example:

    - This is the day that SIVB occurred. As you can see we started the day somewhat bullish and then once the news came out the market completely shifted to extremely bearish. You can see that all of the previous days key levels are identified. The selloff started to get aggressive once we broke the previous day close (blue line) and then got extremely aggressive once we broke the premarket low (dotted red line) then even more when we broke previous days low (solid red line). These key levels are very important for this exact reason. Aggressive trends occur once we are in free territory to move which most likely occurs when we are OUTSIDE of the previous days range. 

Market Internals:

SIVB collapse day

Left to right (Volume Delta, Advance Decline line, Tick)

   - These internals are very important for retail traders to identify because they uncover the blindfold of the market. When the Volume Delta is skewed past -2 or even lower, that is quite extreme selling. As you can see on the SIVB collapse day we hit -5.4 which is very extreme. The ADD was also selling off in a beautiful trend straight to below -2000 which is very extreme. The TICK was also mostly below 0 and putting in a ton of -1000 values which again is extremely bearish.

Sectors: 

SIVB collapse day

    - The sectors within the SPY play a huge role in the directionality of the day. As you can see the sectors based out and then slowly started to decline slowly then really picked up once the SPY broke below the previous day low. If the sectors are this red then the SPY will 100% follow them. 

4. Reading the Tape

    A. As I imagine, SMB wont be too happy about this but I do not read the tape at all. The main reason being that Thinkorswim has terrible data for L2. I have tried to use bookmap and it seems as though it is not too useful. As I progress in trading I will continue to look at these metrics and make sure I am doing some type of volume analysis on the market. To me, the VOLD and TICK are good indicators of how much volume is being put through the market but when it comes to tape reading, I dont do it. Again, I would totally love to read the tape but my data is not great and until I am better at reading my own analysis I think it might cause some analysis paralysis. 

5. Intuition

    A. As a newer trader I believe my intuition only rarely because I feel as though a lot of the time when I "feel" something, I am wrong. Since I am a discretionary trader, I want to find any way to systematize my approach. The only way for me to do that is to breakdown the market into its phases such as Macro, Micro, Intraday. When those phases align I do well, when they dont, I struggle. Most of the time it seems as though they dont align and the macro is the opposite of the micro or they are both ranging. In those scenarios I rely much more on Intraday technical levels combined with market internals to gauge the momentum. As you can imagine, I struggle as well with that. 

Example of a trickier day:

3/24/23

1. Big Picture:

    - SIVB collapse already happened and fears of a 1929 recession have been reduced to something more alike 1907 which is when JPM bailed out the Fed. If these bank run fears have subsided then the bull market will resume and since a lot of the bigger names such as JPM SCHW BAC took big hits from the SIVB scare, the market may be in a big "discount" zone for institutions. The fed came out with a rate hike of 25bps 3 days ago and the market was originally attempting to price in a 50bps hike that was reduced down to 25 the moment that SIVB occurred. Since we had a smaller hike than previously thought, why is the market selling off from the rate hike high? Perhaps the fear of banking collapse is still apparent. Where is the overall trend?

Macro: Range 

Micro: Uptrend

    - Since we are at the bottomside of the uptrending channel, it is time to look for longs. 

2.  Intraday Fundamentals

    - The only significant news we had that would fundamentally change the SPY is Durable Good Orders which usually has little to no impact to the overall market.

3. Intraday Technicals

    - In terms of Intraday technical levels this is quite a unique trend day. We opened with a gap down and immediately were trying to break the previous day low (solid red line). After failing to break below the premarket low (dotted red line) we reclaimed the move back above the previous day low and then eventually get that last pullback to previous day low and then we started to really get clean momentum to the upside. This is a choppy trend day but on that last higher low right on previous day low we really started to get aggressive to the upside. The hold of yesterdays low with the reclaim of the previous day close (blue line) is pretty clear that sellers are NOT in control.

Internals:

    - This is a tricky day in terms of reading the market internals. The VOLD (left) was red at the open fueling further selling from the fed rate hike day that was 2 days prior. If the VOLD is below -3 and the ES is still not breaking below previous days low then that is the first singal that something might be wrong here. As the VOLD unwinds back to neutrality (any value that is between +/-2) then we can expect more ranging or neutral price action to occur. In this scenario we had strong selling at the open so since VOLD is going more neutral it can give u more confidence to trust a reversal to the long side. Again the ONLY reason I would take a reversal to the long side if because we are touching the micro uptrend bottomside of the upchannel. The ADD is very strong here. At the open it was mostly weak but that subsided quite fast and then throughout the session we just slowly grinded higher throughout the day. The TICK was mostly neutral at the beginning of the day and stayed mostly neutral but one nuance about the TICK that only someone who watches it daily would understand is that the more +1000 values we put in, the more its bullish. The TICK is neutral 90% of the time but those small nuances can tell a big story.

    - In the beginning of the day the offensives (bottom half) started to selloff but instead of selling through the low and continuing, they based out and slowly started to grind higher. The real winners of the day were the defensives (top half). This is a great example of a "risk off grinding green" day. As you can see institutions were not very willing to put on risk because if they were they would be buying up the offensives, and instead they were buying up the defensives at higher rates. When the sectors are grinding higher like this, the market follows.

4. Reading the Tape

    - As I stated above, I do not read the tape (for now) but the overall market depth and internals were telling the clear story that we were going to slowly grind higher throughout the session. Albeit, this example is much more tricky than the SIVB example but small nuances such as identifying neutrality amongst apparent selling on VOLD, break below yesterdays low and reclaim it after failing at the previous day close for the gap fill, neutral to bullish TICK, ADD moving higher since the opening push to the downside, mid day holding at highs with VOLD going green and TICK putting in +1000 with ADD moving above 0 line. For all these reasons we were clearly signalling bullish momentum.