A Trading Strategy for All Traders

by | Dec 1, 2024 | Chart of the Week Past

In this Chart of the Week, I am using some of my post from the 11-25-24 Advisory Swing and Options Trader Letter. Each letter provides education, market and sector review, market internals, swing and options trades, and video updates.

This part of the letter will provide a strategy for all traders.

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The Master Trader top-down method of stock market analysis is a comprehensive approach that starts with a Techno-Fundamental perspective and narrows to individual stocks.

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At the beginning of the week, we were looking for corrective price action, and we got it, but not in the way we hoped for.

Last week’s letter explained that we looked for stabilization between the 20- and 50-MAs in the S&P 500 daily chart. That didn’t happen, and here’s why.

Our expectations for patterns to develop are based on what they’ve done historically. However, many patterns can happen, some of which have higher probabilities of occurring and will have different outcomes.

S&P 500 - SPX At the Time of the 11-25-24 Letter

Continuing to use the S&P 500 daily chart is an example. After becoming extended and rolling over, it gapped down significantly on Friday, the week before last.

There was an unfilled gap below, and we always look to areas where buyers would be most confident entering, which is always an area of price support.

I also know from experience that those using the typical oscillators for guidance when prices are ready to turn would not have had “oversold” signals.

A move lower between the 20- and 50-MAs would’ve aligned with other strategies.

If you are using one of these oscillators, you might think you’re using the wrong one or the wrong settings since prices did not get oversold but did move higher at the end of last week. This is one of the reasons indicators are a black hole.

Expectations can be a double-edged sword, but they are necessary to create a plan for the day or week.

Watching for prices to enter the optimal area and then waiting for a price pattern to develop before striking is part of what we call “factory work.”

There is also a way for it to enter the optimal area, which would be "fluid."  We would not have wanted prices to spike up near the recent high and fall back into the area between the 20- and 50-MA.   It would have been too erratic.

It’s great when a plan comes together that provides us with a high-probability opportunity to trade with multiple MTS concepts aligned!

But how do you deal with or assess a situation like the one that occurred last week when prices did not move to the optimal area and provided a turn?

Master Trader Technical Strategies (MTS) uses the concept developed many years ago called Bar-by-Bar Analysis.

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Each trading day pre-market, we review the broader markets, open trades, possible new trades, and potential SPX 0 DTE trades with educational information.

Last week, as the price pattern developed early in the week, I explained what was occurring and how expectations were changing using Bar-by-Bar analysis.

Monday was an inside day (Monday’s range was inside Friday’s range), and if prices traded under Friday’s low, they would move between the 20- and the 50-MA.

On Tuesday, prices gapped lower and continued lower but eventually turned and rallied back toward Friday’s high with a closing bullish reversal.

This bar (price action) signaled buyers were stepping in and buying aggressively; that price action signaled most were anxious to get in and unlikely to wait for a move lower — this shifted our expectations to "buy the dip" on Wednesday.

You can listen to premarket recordings on YouTube.

On Wednesday, prices dipped further than expected, but buyers stepped in again, aggressively pushing prices back to the day’s high, leaving a Bottoming Tail (BT) bar.

Master Trader Tip:   A bullish reversal bar followed by a BT bar which communicates strong demand and higher prices.

Prices had to go up; well, they didn’t have to, but if they didn’t, the price action would be borderline insanity. It happens.

Bar-by-Bar analysis shifted the expectation now that prices would move higher into the unfilled gap above and possibly move toward or above the old high.

Prices gapped higher on Thursday, filling the gap and making new entries undesirable. However, prices dipped lower into the morning gap, where buyers stepped in.

Another BT bar formed, again communicating buying the dip.

On Friday, prices opened close to unchanged. It was unusual that the buying enthusiasm subsided, and prices didn’t gap higher.

Prices didn’t get far from where they opened on Friday, but they didn’t give back either, signaling buyers were confident to hold over the weekend.

Resistance is nearby, but the trend is up, and with the bullish price action, prices should exceed the prior high. Last week’s low is critical support this week.

Using MTS Bar-by-Bar Concepts, you will know what to do when your typical setup doesn't materialize. 

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Happy trading!  If you have any questions or comments, please e-mail Greg Capra at Greg@mastertrader.com or Dan Gibby at Dan@mastertrader.com