The Anatomy of a Trade

I call it the Dance of Chance trading method, and it has everything to do with the Black-Scholes options pricing model, chart patterns, and the auction nature of the stock market. Together, these three elements form the cornerstone of my approach. My upcoming book, titled On Any Given Friday, is jam-packed with real-life practical examples, one of which played out on Friday (today, per this writing).

On Thursday, I posted chart 1 below, in which I identified the double top in the $SPY, calling for a preliminary target of 218.52. But this has little to do with the trade opportunities that often present themselves on any given Friday. Take a look at chart 2 and you'll quickly recognize the bearish SHARK harmonic pattern having a PRZ (Potential Reversal Zone) ranging up to 220.26. One valuable thing I've come to learn over the years is that patterns rarely have random targets. In this particular case, the SHARK unfolded in 'mean-reversion' fashion, aiming to retest the weekly POC (Point of Control) of 222.25, as depicted in chart 3. Not surprisingly, this price level is also the double top's confirmation point. 

In a way, the market's objective on Friday morning was to test the waters, i.e., the buyers' and sellers' resolve, on the back of two days of intense selling. Clearly, the sellers had already established a strong outpost at 220.25, and all attempts on the part of buyers were successfully repudiated. I suspect 218.52 will likely be seen in the coming hours. 

Although I passed up on trading the bounce up to 220.25, the above narrative led me to fade this bounce by selling 200 x weekly 220/221 call spreads and collecting a total premium $4,800 (24 cents/share). My mental stop was set at 220.27.  Per this writing, the spread is flirting with worthlessness, and I fully intend to close out the trade at 1 to 3 cents/share. 


Chart 1. A double top was confirmed upon breaking below 220.25, i.e., the weekly POC. 


Chart 2. A bearish SHARK harmonic pattern unfolded on Friday morning, aiming to test the weekly POC. It is dubbed 'bearish' because a potential reversal is to be expected upon reaching the intended target (i.e., the Potential Reversal Zone, or PRZ). This chart was captured well after the reversal had gotten underway on the heels of a TD Sequential Sell 9-13.


Chart 3. The $SPY back-tested the confirmation point (and the weekly POC) at 220.25. The bounce began on the heels of a 'TD Buy Setup 9', i.e., nine consecutive bars where each bar closed lower than the closing price four bars earlier (a Tom DeMark indicator).

 

Trade Smart,

Peter Ghostine (@peterghostine)


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