Originally written for r/RealDayTrading Dec 24, 2021
It is absolutely critical that ALL of your trade analysis begins with a longer-term view of the market. Your market opinion and your confidence in that opinion will drive all of your trading decisions.
My opinion is that the volatility is starting to increase and that resistance is building at the S&P all-time high. The long-term uptrend is still intact, but the momentum is starting to wane and we are seeing some profit-taking. Artificial low-interest rates are keeping buyers engaged, but that tone is changing as the Fed starts to tighten. My market opinion is the result of hours of technical and fundamental analysis.
For swing trading, this means that I need to be cautious. I can expect big dips so I had better distance myself from the action and sell out of the money bullish put spreads on strong stocks when the market dips to major support. I can tell from the price patterns over the last two years that these dips do not last long so I need to act quickly on those drops. Once the positions are established I can expect a market bounce and then time decay will work in my favor. Those spreads will expire and then I need to wait for the next dip.
For day trading right here, I can see that the SPY formed a bullish hammer after it tested the 100-day MA. The next day the market had another bullish hammer and it closed on its high of the day and above the 50-day MA. This was a short-term bullish pattern and if I wanted to hold some of my day trades overnight I could. We are in pre-holiday mode so the volume will be light. There is a strong seasonal bias to the upside so I should favor the long side for my day trades.
These are my market opinions and you need to conduct this type of analysis so that you can develop your own opinions. Sometimes you might not have a market opinion and that is OK. It tells you that the market could go either way and that you should error on the side of caution.
When experienced traders ask me to review a losing trade I can usually trace the issue back to market analysis. Do you remember your little league days when your coach would instruct you to “keep your eye on the ball”? The market is “the ball”. Never take your eye off of it.