Paint By Numbers

Yesterday produced an epic tape-painting session.  First, 48K e-mini contracts hit the market to "break it out" to 1407.44 on the S&P index.  Realize that after the market has essentially traded nowhere for seven straight days, the net gain on this break out was just over 7 points, which is to say "not much."

Then the market double-topped around 3:3pm EST.  It then broke below the important 1415.32 level.  Since there was very little volume in the market compared to the May 1st swing point, a close below 1415.32 would have been very bad.  In Richard Wyckoff -terms, getting above a swing point on lower volume and closing beneath it signals a lack of buyers and an exhaustion of strength.

Someone (or some entity perhaps in a bunker not far from Nassau Street in Manhattan working in conjunction with certain traders in the CME pits) is also well aware of this. So 50K e-mini contracts magically appeared at the precise time and price to support a close on the S&P index above 1415.32.  The index closed at 1415.51 with 18% less volume than May 1st.

I had tweeted yesterday that a close above 1415.32 would signal to me that not only the 1422 April highs were the next target, but perhaps even 1430-1440.  I stand by that.  But I'd love to give it one more day.  Short-term market hijinks are one thing.  A weekly close is another.  If 1415.32 holds for the week, then I'll start considering those higher numbers.

For now, though, I'm noting that the e-mini has had its work cut out for it in the overnight session trying to hold on to 1412, which was the magical level of defense yesterday.  I'm also seeing more weakness in AUDUSD and AUDJPY, and more strength in GBPAUD, all of which add up to "caution ahead."

Today is option expiration and I will lose money on a bunch of SPY 140 puts.  By hedging against them, I have mitigated some but not all of the loss.  Yesterday was a good day for me with the SSO which I then swapped out and replaced with SPY 142 calls.

The point is that I've been wrong thus far about the 1380-1400 level being a sell zone. The hit I'm taking with the puts amounts to my wager.  The net loss totals about  .5% of this particular account.  I can afford to lose this sort of wager many times before it adversely affects me.  This is risk management.  As a trader, I must accept that I will be wrong many times, however, I feel fortunate to have found a method that allows me to know when and where I'm wrong to the penny.  It's not perfect, but then again nothing is.  Live to play another day.