July 2023

Introduction

FOMC weeks are always a lot of fun for indices traders because you can pretty much guarantee that there will be a lot of volatility after the interest rate announcement and the subsequent comments from Jerome Powell, and this week was no exception.

Although an interest rate rise of 0.25% was announced on Wednesday, as expected, we still saw some big price swings in the markets on Thursday and Friday, and I think yesterday’s price action in particular will have surprised a lot of traders.

Nasdaq Chart After Thursday

If you look at the price chart of the Nasdasq 100 after Thursday’s close, you will see that the price rallied up to around the 15,800 level early in the trading session before dropping all the back to 15,413 towards the end of the session, creating a very bearish shooting star-type candlestick on the daily chart.

It also closed just below the EMA (10) on the daily chart, which is a slightly bearish signal in itself, and was now trading fairly close to the more significant EMA (20) at around 15,400.

Therefore it was natural to assume that after seeing the price reversing sharply on the day, and with the price now trading close to the shorter term EMA’s that so often signal a change in trend when they are both breached, Friday was likely to be a continuation drive lower and the bullish trend may be coming to an end, in the short term at least.

However the Nasdaq, and the markets in general, had other ideas…

Nasdaq Chart After Friday

As you can see, after Thursday’s reversal, the price started to bounce back pre-market in the London session, and continued to move higher when the markets opened at 2.30 PM (UK time), closing the day and the week around 15,741.

So Friday ended up being a large inside bar, and the price reversed nearly all of the downward movement that we experienced from Thursday’s high, which just demonstrates how strong the markets are right now, and why it is foolish for bears to countertrend these markets at the moment.

When to Short the Nasdaq 100

I obviously cannot provide trading or financial advice on this blog, but if I personally was looking to short this particular index, I would be waiting for the price to close below the 20-day moving average.

Even then I wouldn’t be rushing in to enter a short straight away. I would prefer to wait for a breakout and then a retest, followed by a continuation move lower.

Final Thoughts

Overall, though, I still think the markets are still too strong to consider countertrending them, particularly after seeing Friday’s very bullish price action.

Although I think we are due a small correction at some point, we are getting towards the peak of the interest rate cycle, company earnings are coming in stronger than expected and if predictions of a minor recession (or no recession at all) are true, it is hard to see too many downward catalysts that are going to drive the markets significantly lower from here, other than a big escalation in war activities outside of the US.

A Profitable Week

I will start off by saying that I had a fairly profitable week overall in terms of day trading.

It was a shortened trading week because of the 4th July holiday and the half day on Monday, but there were still plenty of volatile price swings in the rest of the week to make up for this.

Here are the trades that I took:

US Oil (Monday): +32 points
Gold (Tuesday): +0.75 points
Nasdaq (Wednesday): -17.2 points
Nasdaq (Wednesday): -12 points
US Oil (Thursday): +29.5 points
US Oil (Friday): -17 points
US Oil (Friday): +17.9 points
US Oil (Friday): +28 points

As you can see, it was not a bad week, but the two trades that really frustrated me were the two Nasdaq trades because these could easily have been avoided.

Breaking My Rules

I’ve been trading for over 20 years now and so you would think that I would be ultra disciplined by now, but the reality is that I still place impulsive trades from time to time that are not part of my overall strategy.

These two Nasdaq trades were placed in the last two hours of trading, and I think the main reason that I took them was because I hadn’t found a decent set-up that was worth trading in the previous 11 hours from 8 AM to 7 PM UK time.

Normally I would just switch off my computer and come back the next day when this happens, but on this occasion I took two trades on the Nasdaq because I had convinced myself that it was highly likely to drop back down to the day’s lows, which it ultimately didn’t.

I think the quiet holiday period may also have been a factor because the previous day on 4 July, I only entered one trade on gold during the London session that came back and stopped me out close to break-even. So I was keen to get back into the markets and start making some money again, which is always potentially dangerous.

Trade Analysis

You can see my executions in the chart below (the red arrows show where I took my short positions and the blue arrows indicate where I was stopped out):

I don’t necessarily think there was anything wrong with the trades themselves. There were logical reasons why I entered where I did and my thesis could easily have played out on another day.

The problem was that although my potential profit would have been much more than my stop loss, in hindsight these were 50/50 trades and I generally like to enter trades where the odds of success are much more in my favour.

In addition, I shouldn’t really have been entering these trades at all because they were not based on my normal trading strategy and based on previous trades during the last few hours of trading, I know I don’t generally trade well during these hours. My win ratio is definitely no more than around 40-50% during this time.

Key Takeaways

The reason why I wanted to write this blog post was to encourage anyone else reading this to stick to their rules and not deviate from their trading strategy with stupid impulsive trades like this.

It will also help me to become more disciplined next time by writing down my thoughts and documenting them on this site.

Although I only traded these with smaller position sizes and I did at least use tight stop losses, it would have been a more profitable week if I hadn’t even considered taking them in the first place, and so this is a key lesson that I need to learn going forward.

Stick to your rules and your proven trading strategy, and don’t place impulsive trades when you haven’t found any set-ups in your usual trading windows and are looking to get back into the markets.

Archives for July 2023

Nasdaq Analysis 29 July 2023 – No Traction for the Bears