I often get asked, “How and when should you short a new high?” My answer is almost always the same. I almost always suggest you should NOT short a new high. Instead, keep buying pullbacks to fresh demand levels. Once the market you are trading reaches a price level where supply truly exceeds demand, the market will for sure form a supply level and that is your key to begin shorting, but not before. Last week however, we had a scenario come up that offered a very low risk, high reward, and high probability shorting opportunity in the S&P Futures as it was making a new high and that is the focus on this piece.
The first chart below is a weekly chart of the NASDAQ, showing this market reaching a larger time frame area of supply (retail prices). This is key information for the long term trader and short term trader looking to profit from speculating in this market.
NASDAQ Weekly Supply
For the long term trader/investor, the chart is telling us that putting money into this market at current price levels is probably not a great idea as there is limited upside potential. We can certainly be a long term buyer in this market, just not at current price level. Ideally, before parking long term capital in this market, we would want to see prices decline to fresh demand levels which are lower on the curve.
For the short term trader, where price is in the larger time frame is also key information. With price at larger time frame supply, the short term trader should be watching the smaller time frames, looking for fresh supply levels to short at and ignoring any demand levels as the odds are strong that price will fall. The potential when price is at larger time frame supply is low risk for high reward. This is where the chart offers us 10:1 and better sometimes. Let’s take a look at a trade I took based on this scenario last week.
S&P 5 Minute Supply Level – Shorting Opportunity
Above we are looking at a 5 minute chart of the S&P. Thursday Nov 8th, the S&P made a new high as you can see above, trading over the 1770 level. At the time the S&P was making a new high, the NASDAQ was into that weekly supply level, suggesting price was at retail levels and a decline was very likely. The next step was to wait for a small time frame supply level to form so I could use that to manage risk properly for a short position.
The supply level developed on the 5 minute chart as you can see (yellow shaded area). Price fell from that basing area telling me supply exceeded demand at that level. Once price rallied back to that supply, I knew a buyer was making a big mistake and offering me a very quality shorting opportunity. The buyer was making three key mistakes. First, they were buying after a rally in price. Second, they were buying at a price level where minutes earlier, the chart told me supply exceeded demand (banks were selling). Lastly, they were buying in an area of larger time frame supply, very high on the supply and demand curve (NASDAQ Weekly). The odds were stacked against that buyer meaning they were stacked in my favor as the seller. Price fell to reach the target but the important part of this piece is the logic and structure behind the entry.
When trading our strategy at Online Trading Academy and trying to predict turning points and market moves, you must always consider two key elements: Location and Structure. What I mean by that is Location of price on the larger time frame supply and demand curve. And, structure of the level itself according to our Odds Enhancers. While I would never push anyone to trade, I will always push people to know what they are doing before they begin trading as risk to losing your money is high if you don’t know what you are doing. Like any other market place, those who know what they are doing, get paid from those who don’t.
Hope this was helpful. Have a great day.
Sam Seiden – firstname.lastname@example.org