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Any trader worth his or her salt has a toolbox of patterns and indicators they use to guide their trading.

But some traders overdo it. These are typically the ones with the fanciest indicators who try to use too many tools to get the job done.

Not me. 

I use only a handful of simple-yet-reliable tools that could lead you to consistent profits day in and day out. Today, I want to talk about my favorite one to use on green mornings, i.e., when futures are moving higher in the pre-market.

We’ve had no shortage of green mornings lately as the longest-running bull market in history continues its press higher. So, this seems like the perfect time to tell you what’s so special about the inverse head-and-shoulders pattern.

The traditional head and shoulders is a bullish-to-bearish reversal pattern made up of three peaks, with the highest peak (the head) between two outside peaks (the shoulders), which are lower but close in height.

The head and shoulders is another one of my favorite setups and great for buying put options. But more on this one another day.

Today, it’s all about the inverse head and shoulders, which is a bearish-to-bullish reversal pattern. As the name implies, it is an inverted version of the head and shoulders where a trough (left shoulder) is followed by a deeper trough (the head) and then another trough (right shoulder) at a similar level to the initial one.

If you’re familiar with me, you know that I’m hyperfocused on SPY, a popular and highly liquid ETF that tracks the S&P 500. Each day, prior to the market open, I attempt to isolate one high-probability option trade. If I expect a move to the upside, I suggest buying a call option. If I expect a move to the downside, I suggest buying a put option.

As I said, on green mornings, I often look for an inverse head and shoulders to play out.

In a perfect world, I want to see a brief dip to a support level at or near the market open, followed by basing and then an upside pop.

The goal is to “buy to open” the call option during the basing phase. I call this “buying the dip,” as it allows me to get in at a lower price. Then, I look to “sell to close” if and when SPY pops.

Because I use options, relatively small moves in SPY often translate into double- or triple-digit percentage moves in a matter of minutes or hours after opening the trade. 

Let’s walk through Tuesday’s Trade of the Day, which is a perfect example of the power of the inverse head and shoulders. It offered traders a shot at 106% profit in just four hours!

Here is what I sent Daily Profit Machine members 30 minutes prior to the market open:

“On mornings like this, you want to have extended hours on with SPY intraday charts (such as a 5-minute chart) and be cautious of a possible pullback at or near the open  due to profit-taking out of the gate when the options market opens for trading at 9:30 a.m. ET. We’re looking at what could be a perfect day to buy to open, followed by selling to close call options applying an inverse head and shoulders, likely using a 5 minute chart.

 

“As a refresher, what you’re looking for using an inverse head and shoulders (in a perfect world) is a brief dip, followed by basing, followed by a pop to the upside. This is the same pattern that allowed for a modest return Monday in a choppy market. That’s part of the reason I consider it to be a fairly reliable pattern to use in green pre-markets, regardless of how green futures are. 

 

“What I’d love to see is a dip to a support level, followed by basing, followed by a pop. Basing is where I’d want to buy to open call options, and upon the pop, should it take place, is where I’d want to sell to close call options. Now, keep in mind that SPY $300 has proven itself as a resistance point a few times recently, and as I’m typing we’re trading less than $1 below it. So be cautious of that SPY $300 level, but I can’t argue with charts this morning!

Of course, I also provided them with the option that I thought would be the single-best trade for that day: SPY July 29 300 Calls.

Check out the chart below. The pattern played out perfectly. 

As you can see above, the market briefly fell, then we had the basing pattern, followed by a strong move higher. It was exactly what I was looking for and traders who spotted the pattern could have doubled their money using the call option I selected.

But the inverse head and shoulders pattern is just one of the tools I use. I recently sat down with Jeff Bishop to discuss my exact Trade of the Day strategy, how I pick options and a whole lot more.

You can watch it here now while it’s still up.

Hope this helps and good trading!

America’s #1 Premarket Trader,
Davis Martin

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