The Forex Chronicles

High Probability Trade on S&P 500 – 26 January 2024

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Introduction

Many traders are sceptical about whether or not you can find high probability set-ups on the lower timeframes because the price can move around so fast, and seemingly at random a lot of the time.

However I believe that it is still possible to find good quality trades on these lower timeframes because I regularly take these trades myself on the 5-minute chart of the major stock market indices, and tend to have a decent hit rate.

Some of the very best traders just use price action alone to find high probability trades, such as Al Brooks, for example, but I like to have a few additional indicators on the chart for guidance.

These include the VWAP indicator, the stochastic indicator and several moving averages, and just yesterday (26 January 2024) they all combined to provide a high probability set-up on the S&P 500, as I will demonstrate in the rest of this article.

The Set-Up

As you can see in the 5-minute chart below, the price of the S&P 500 opened slightly higher when the market opened at 14.30 (UK time) before dropping back towards the VWAP indicator (shown in black), where we saw a lot of sideways price action and indecision around this key indicator.

Crucially, the price failed to close below the VWAP and was also trading close to the 10, 20 and 50-period exponential moving averages, so this was all pointing to a possible breakout.

Trade Execution

I was already going into the trading session with a bias to the long side because the trend was so bullish on the higher timeframes.

So when the price bounced off the VWAP, and closed above these three moving averages with one very strong 5-minute candle, I was ready to enter a long trade if the price broke the high of this candle, which it duly did.

The fact that the price closed above the highs of the previous 6 candles and was showing significant divergence on the stochastic indicator at the bottom of the chart just gave me added confidence that this was going to be a strong breakout.

I ended up entering a long position on this initial breakout at 4894.4 and closed half the position at 4900 because this was a major round number that could have acted as strong resistance, and the other half at 4905 after the price had continued pushing higher without any red candles.

As a result, I banked a total profit of just over 8 points from the two positions combined.

Closing Comments

You can see from the chart above that the price of the S&P 500 subsequently dropped back later in the session, but that was irrelevant.

The point is that at that particular time, the indicators and price action were all pointing to a breakout to the long side, and when I see a confluence of indicators like this and a tightness of price action prior to the breakout, this is a time when I like to take a position.

It is rare to see the price of this particular market trading in a narrow sideways range around key indicators at the start of a session, but when you do, you know that in most cases there will eventually be a breakout and a strong surge in one direction or the other, even if it doesn’t last for the whole day.

So it is always worth keeping an eye out for these high probability set-ups because they do come up on a regular basis, even on the 5-minute chart, which is my preferred shorter term timeframe.

They won’t always be profitable of course, but by using tight stop losses, there should be more winning trades than losing trades, and the profits from these trades should exceed any losses that you may incur.

Example of VWAP Bounce Trade on S&P 500 – 18 December 2023

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Introduction

I just uploaded a new article to this site a few days ago that took a closer look at the VWAP indicator, and how it can benefit stock, indices and forex traders, particularly those who like to day trade these markets on the lower timeframes.

In this article I pointed out that one of the best set-ups is when you get an initial move higher followed by a retracement back down to the VWAP indicator because this is where you will often see a strong level of support, and in many cases a nice bounce higher.

Well as it turned out, we got a textbook VWAP bounce on the S&P 500 only yesterday and it is this trade example that I want to walk you through today.

S&P 500 Trade Set-Up

As you are probably aware, the markets have been really strong in December and getting close to new all-time highs.

Subsequently, if you would have looked at the longer timeframes on the S&P 500 at the opening bell yesterday, you would have seen that the price was above the 10 and 20 exponential moving averages on the monthly timeframe all the way down to the 4-hour timeframe, and had just popped above them on the 1-hour chart as well.

Therefore the trend was ultra-bullish, and you should only really have been looking for opportunities to go long because you would really have been swimming against the tide if you had attempted to short this market.

One way of doing this is waiting for a retracement and then taking a long position when the price moves upwards through these moving averages on a lower timeframe, but VWAP bounces can be just as effective when they occur.

Obviously if you get a VWAP bounce and a move through the moving averages, that’s even better!

Trade Execution

In the case of yesterday’s price action on the S&P 500, we did see an initial move higher, but short-term traders will have noticed that the price started to retrace back towards the VWAP on the 5-minute chart after the first hour of trading.

As I mentioned earlier, with the underlying trend being so strong, this is the area where traders should consider going long if buyers started to step in, and the close of the highlighted candle was a good time to do so.

This is where we saw the first strong bounce off the VWAP, and we also saw the price break through the prior highs from the previous two candles as well. Plus it also closed at the high of the candle, which was another sign of strength.

You will also see that the price just about closed above both the 10 and 20-period exponential moving averages as well, so this was a really high probability set-up.

Your losses could be easily capped by placing a stop loss just underneath the most recent low, or somewhere just below the VWAP indicator, and your potential gains to the upside are essentially unlimited.

Closing Comments

It’s always important to point out that these and other similar set-ups are not completely foolproof.

There will be times when the price will look like it is bouncing back off the VWAP indicator, but then burst straight through it and continue moving lower, but if you manage your losses, this isn’t a problem and is just part of trading.

The key to successful trading is to find opportunities to put the odds of success in your favor, and trading VWAP bounces is one way of doing this if you wait for the right set-ups.

S&P500 Shorting Opportunity at VWAP and Fib Levels – 20 October 2023

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Introduction

As I am based in the UK, I don’t generally like to trade on Friday afternoons when the US markets open. I prefer to close out any positions before then and finish early for the week.

That’s because Friday’s price action can be difficult to predict, and if a trade does move against you, it is a horrible feeling to take a loss at the end of the week heading into the weekend.

The alternative is to hold a position over the weekend, but it can be very expensive because of the additional fees, and you run the risk of the market gapping up or down when it opens the following week, incurring even greater losses.

So I didn’t trade the S&P 500 at all yesterday, and didn’t even look at it until it closed, but I did notice a very high probability short set-up that I missed, and thought that it was worth discussing it in more detail.

Bearish Sentiment

With everything that is happening in the middle East right now, I think most traders would naturally be nervous about holding any long positions over the weekend, and may well have been looking for opportunities to short the S&P 500, expecting a sell-off heading into the close.

As it turns out, this is exactly what happened, and looking at the price action, there was an excellent opportunity to go short right in the middle of the session, prior to this.

VWAP and Fibonacci Confluence

The S&P500 was relatively strong at the open, hitting a high of around 4277, before the sellers and shorters came in, driving the price all the way down to a low of around 4230.

Some traders will have attempted to short the opening rally, expecting a sell-off, and some momentum traders will have jumped on board during this downward move, but traders who were late to the party still had a good chance to short the subsequent pull-back rally.

By applying the fibonacci tool to the high and the low of this downward move, you could have easily identified potential reversal points at the key 50% and 61.8% fib levels, and if you use the VWAP, like so many other traders, you will see that this indicator was sitting very close to these key levels as well, creating another strong resistance level that the price has to get through.

Subsequent Price Action

As you can see from the 5-minute chart of the S&P500, the 50% fib level and the VWAP (shown as a thick black line) were at exactly the same level initially, and the price immediately sold off at this area of confluence, as you might expect, giving a maximum profit of around 12 points.

The price then bounced back and briefly broke through the VWAP, attempting to test the important 61.8% level, but after making two attempts, this also acted as a strong resistance level and the price ended up making a decisive move below the VWAP back to the lows of the day.

Final Thoughts

The main point that I want to get across in this article is that when you have the VWAP and some key fibonacci levels at the same price levels, particularly after a big price move beforehand, this can present you with a high probability trading opportunity.

Traders will always be looking to trade VWAP reversals anyway, and if you have a strong 50% or 61.8% level close by (or both), this will only add to their conviction.

In this case you also had very bearish sentiment and nervousness about the markets generally due to geopolitical tensions, so all of these factors combined to give traders a very nice short set-up.

I know many traders don’t like to use fib levels, but this is one more tool that you can use to tilt the odds in your favour, so it should never be disgarded completely.

If you missed this particular trade, like myself, don’t worry because there will be always be many more like this in the future. You just need to keep your eye out for them.

Account-Destroying Trading Range in the S&P500 – 23 May 2023

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Introduction

As a day trader, you always want to see strong trends upwards or downwards with plenty of volatility because this will enable you to either ride these trends upwards or downwards, or trade the reversals when these trends run out of momentum.

The one thing you don’t want to see is a very narrow trading range with little or no volatility because this can make it very difficult to find winning trades, and can actually destroy accounts.

However this is exactly what we saw in the first 3 hours of the trading session when the S&P500 market opened earlier today, as you can see below:

Trading Range

The price did fall later in the day, but during this opening 3-hour session, when most day traders like to trade, the price of the S&P500 was just drifting in a sideways trading range between about 4178 and 4185, which is just a 7 point range.

There were a few occasions when the price moved out of this range, but it quickly moved back to this trading range each time.

Why Narrow Ranges Are So Hard to Trade

There are some day traders who like to trade tight trading ranges like this, and will just continue to sell short at the top of the range and go long at the bottom of the range, capturing small profits each time, but the vast majority of day traders don’t trade like this.

Most day traders will tend to trade breakouts out of this range in the hope of capturing the start of a new trend, and when you get a sideways market like this, it can potentially destroy accounts as traders keep getting stopped out on every possible breakout.

The problem is that you don’t really know that the market is going to trade like this before the market opens. In fact the S&P500 (future) actually moved more than this when the US market was closed, trading as high as 4210 in the overnight Asian session.

So you would think that having fallen so much out of hours, the price would move a lot more when it actually happened, but this wasn’t the case today.

Closing Comments

The point I want to get across is that very tight trading ranges are generally very bad news for the vast majority of day traders because they can really chop you up and result in lots of small losses.

There is no way of knowing whether you are likely to experience a day like today ahead of time, although the market will sometimes give you clues.

For example, if you get two or three days where the trading range has been well above the ATR (average true range) on the daily time frame, then there is a higher chance that you will see a smaller consolidation day with a tight range at some point.

Similarly, if you have a large daily candle up and an equally large daily candle down with the price closing somewhere near the middle, you are quite likely to see an inside bar day in the third day.

Finally, if the price has been trading in a narrow range on the higher time frames, which the S&P has been doing, then this increases the chances of a tight range as well.

Therefore if you are struggling to make money from day trading the S&P right now, you certainly aren’t alone.

The S&P500 can be a great market to trade, but it might be a good idea to trade more volatile markets such as oil or the major forex pairs when this index continues to trade in a narrow range on the daily chart.

3000 Could Be Key Resistance Level For S&P 500

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2020 Price Action So Far

It is fair to say that 2020 has been a complete disaster for many stock market investors thanks to the global coronavirus pandemic that has effectively closed down the world’s economy.

You only have to look at the price chart of any mid-large cap stock, or any major stock market index for evidence of this.

The S&P 500 is a classic example. Even as recently as February, this index was closing in on 3400 and making new all time highs before the virus started spreading outside China.

However things really turned negative in March as the effects started to be felt in many countries all over the world, with thousands of new infections and rapidly growing death rates ultimately leading to complete lockdowns and the closure of many businesses.

Subsequently, the S&P 500 fell all the way down to around 2200 at one point, so it is quite remarkable that it has since recovered back up to the 2800 level.

Strong Resistance

At the moment, however, it is hard to see this upward price move continuing for much longer.

As I posted on my eToro feed yesterday, it is getting closer to its 200-day exponential moving average, which by itself often acts as strong resistance.

However the fact that this indicator is also very close to the 3000 level, ie a major round number, makes this even more significant because it is likely to provide even stronger resistance.

Here is the chart that I posted yesterday:

SPX500 - 15Apr

Since then, the S&P 500 has fallen from 2830 to it’s current overnight level of 2800, and all of the additional indicators are still suggesting that this market is currently in overbought territory and likely to fall, as you can see below:

SPX500 -April 16

The MACD histogram is slowly falling as the price has been rising and the stochastic indicator is still above 80, suggesting it has potentially reached a peak. The only exception is the RSI indicator because this has not yet crossed above 70, suggesting that the price could yet go slightly higher.

However this latest price chart is still pointing towards further weakness in the coming days and weeks.

The Fundamental Argument

It is all well and good looking at the price charts to make trading decisions, but it is often good to look at the fundamentals as well.

The S&P 500 has been trading on a large P/E ratio for several years now, prompting many to sell their index ETFs, VOO, SPY, etc, and wait for a reversal to buy back in cheaper.

Even though the index is well below it’s all-time high, the fact remains that it is still trading on a very high multiple. As of yesterday, iShares’ IVV was still trading on a P/E ratio of 18.75, and this doesn’t really account for the fact that the earnings part of this formula is likely to fall sharply later this year, pushing the P/E up even further.

Final Thoughts

So these are some of the reasons why I think the S&P 500 is likely to fall in the near future. There are strong arguments both fundamentally and technically why the S&P 500 could easily drop to 2500 again, and possibly even further.

When you also take into consideration the fact that we are still a long way off developing a vaccine for COVID-19, and many countries are still in lockdown, it really is hard to put forward any arguments why this index should rise much further at the present time.