Earlier this week, I told you there were a lot of variables that could cause the market to turn lower. And I said I was prepared for that outcome thanks to one of three tools in my trading toolbox: the head and shoulders.
Tuesday’s Trade of the Day was such a great example of the power of this pattern that I couldn’t pass up the opportunity to show you it in action.
Now, I send the Trade of the Day 30 minutes prior to the opening bell each day. It includes my thoughts on where I think the market is headed that day, key support and resistance levels to watch, and a single option trade that I have selected from the thousands of choices out there as the best opportunity for that day.
As I was preparing Tuesday’s Trade of the Day, SPY (the ETF that tracks the S&P 500 and my trading vehicle of choice) was toying with $300 in premarket trading.
Given the Federal Reserve meeting taking place this week and the fact that Apple’s (AAPL) earnings were on the horizon, along with what I was seeing on the charts that morning, I expected some mixed price action and elevated volatility Tuesday (we got both).
Days such as this warrant some caution, which is what I advised when I sent the Trade of the Day email:
“Given the rate cut noise surrounding the Fed meeting, market-moving news could strike at any given moment. So, it wouldn’t be a terrible idea to exercise patience. There’s a lot of uncertainty out there, and I’d hate for anyone to get stuck on the wrong side of the market!
“Now, as I’m typing, SPY just broke below $300. My indicators are pointing south but are almost extended to the downside. It may be another volatile open. Just a friendly heads up! What I’m going with for today’s Trade of the Day given European markets is put options applying a head and shoulders.”
As a quick refresher, a 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.
As you can see on the five-minute chart below, a head and shoulders formed between roughly 11:20 a.m. ET and 11:40 a.m. ET, and once it did, SPY headed lower.
Traders who heeded my alert could have made up to a 20% profit in just 20 minutes as SPY bottomed out around noon. Like the example I showed you earlier this week, that’s like earning 1% a minute!
How’s that for the power of the head and shoulders and my Trade of the Day strategy?!
So, will today’s Trade of the Day be another 1%-a-minute kind of deal?
It’s too early to tell, of course, but I will tell you what I’m planning to do…
The Fed is set to announce its interest rate decision at 2 p.m. ET. I know many traders plan to sit on the sidelines, as no one wants to get caught on the wrong side, especially when it appears a rate cut has already been priced into the market. But not me!
My plan is to get in and out of today’s Trade of the Day quickly and then go all cash through the Fed announcement.
Once the Great and Powerful Powell has spoken, I’ll revisit markets. My hunch is that volatility will remain elevated even as stocks settle down after the announcement, presenting abundant (and lucrative) trading opportunities.
If you’re unsure of how to trade ahead of and following the Fed announcement, there’s always room to jump on this train and trade alongside me.
If you act quickly, there’s even time to get in on today’s Trade of the Day.
America’s #1 Premarket Trader,