When an Index gets beyond the “Point of No Return,” it’s time to short the strongest indexes.
When day trading, I love to see indexes right after the opening get to the “point of no return.” What does that mean?
Here is an example:
Yesterday, March 10th, 2016, many indexes were all bumping up against overhead resistance on a daily. As I mentioned in the Simpler Options Live Trading Chat Room, I was watching the /TF carefully. The /TF, on a 78 minute chart, had already broken an ATR trailing stop. The /TF seems to lead the overall market.
The /TF’s started falling apart right after the opening, while the /ES’s held up pretty well.
Once the /TF was down enough, the /ES HAD to take notice.
1) The first key was the /TF being down for the day.
2) The next was the /TF being way down for the day, which I feel was at least 10 points.
As seen on the following chart, the /TF’s topped out before 10 AM EST. The /ES didn’t 10:30, when the /TF was down 10 points.
When I see this divergence, I want to short vertical call spreads in the /ES. Why? When I see extreme weakness in one major index, at the minimum the other indexes will have muted rallies.
Since the $SPX verticals expired the next day, a low risk play is to short the 2010-2-15 call vertical for 1.20. I actually shorted it 4 times at 1.20. 8 minutes later it was already 75 cents!
Learn more about Chris Brecher’ strategies, indicators, and how to find the most consistent trading patterns to day trade (stocks, options, futures & ETF’s), check out his next class at Simpler Stocks.