In this case, don’t fight the Fed

Time and time again I’ve had people tell me, “But HOW did X chart trade directly through my resistance levels?” And I’m right there with you. I’ve said it myself a time or two.

That’s why today, especially with this crazy earnings season (where that could very well be happening to you right now), I’m going to explain to you why while resistance is important, larger macro forces can cause the market to rally through resistance.

I’ll show you why you need to adjust your thinking and stop trying to short at resistance — because the overall market is rallying, and the macro story can be more important than the technicals…

Hint, hint right now the macro story is more important than the technicals.

That’s why I’ll start with some word of wisdom from Neil Yeager, one of our Futures traders and a mentor of mine. He said, “Never forget — there’s never been a line on a chart that the market can’t trade through.”

No matter how critical your area of resistance is, no matter how good your technical pattern looks, if there’s a catalyst (say for example, the Fed, or a positive earnings season), resistance can break and we can get ‘a switch.’

What’s the switch?

It’s a technical pattern in which you can see where the stock changes trend, either from a downwards trend to an upwards trend or the reverse. This is something that Raghee, another of our Futures traders, calls the ‘Wave Reversal,’ while Carolyn, our Fibonacci Queen, will identify this through a moving average cross trigger, and finally, John, our fearless leader, will see it through a ‘break of the high of the low bar’ trigger.  

In case you haven’t met me yet, as all of these fine folks are my mentors, I’ve combined pieces of these technical setups and looked to identify all of this at once. That setup is what I call ‘the Switch.’

Each of these technical setups have specific moving averages and indicators involved., However, really at the end of the day, for me, it’s just the point where you recognize that shorting what was once a nice downwards trend is futile because it’s shifted.

Take for example my short setup on Pepsi. This was a short that made ‘the switch’ this week, and consequently, my short position lost money.

Pepsi (PEP) Daily Chart

On Pepsi, I was shorting one of the weakest stocks in one of the weakest sectors, consumer staples. However, the broad market rally took Pepsi up with it, telling me that I should stop trying to short even weak stocks in this strong market. Sometimes the places where you lose money are even more important than the spots where you make it. Pepsi experienced ‘the Switch’ and I lost money on my shorts.

But, this goes back to more than just one trade and one setup.

It’s critical in trading to identify where you’re wrong, so you can get out with limited losses. It’s also critical to understand what it means when so many sectors and stocks that previously looked so weak are rallying along with the market. This is what we call a broad market rally. Instead of only a couple key sectors taking the market higher, we can still identify stronger and weaker sectors, but for the most part, we want to stick with the tide.

And, the direction of the tide is up.

After positive comments from the Fed, and and overall positive earnings season that have led this broad market rally, I’m done trying to short even weaker stocks.

Why?

These are rallying right along with the market. Honestly, I’ve learned this month that fighting the Fed, and trying to get the market to stop at my areas of resistance… was futile. Instead, I should’ve only focused on riding the wave higher.

The next obvious question here is, what do we do?

Well, stick with the direction of the tide, which is up. Focus on the strongest stocks, that even if the market takes a turn again, should remain steady. The Phoenixes — remember these from Monday?

Two of my favorites are Etsy and AutoZone.

Both have squeezes, a solid trend, weren’t hurt too badly in December, and have earnings coming up in February.

ETSY Daily Chart

On this ETSY 195-minute chart, you can see this bullish setup, with a price target of $62.73, and earnings date at the end of February.

Additional stocks I like (but I wouldn’t buy until they pull back a touch) are Oracle (ORCL), Salesforce (CRM), Adobe (ADBE), and Burlington (BURL).

So, you may ask, at what point CAN we look to the short side again, and where?

Well, we have to watch for the switch. I haven’t seen any signs of it yet, but I’ll tell you when I see it. Until then, I’ll focus on riding this wave to the upside.

P.S. If you want a deeper dive into this topic along with more analysis, check out my video within Simpler Playbook (it’s part of the Foundation Membership). If you don’t have access, you can sign up for Foundation HERE.

4 thoughts on “In this case, don’t fight the Fed”

  1. Excellent information, Danielle! I find myself doing the same thing in my efforts to have some hedges in place and balance the overall delta in my portfolio. I need to start looking at all of the sectors more regularly as part of my daily market analysis routine and make decisions on whether to hedge or not based on that. Thanks for putting this together.

    Best,

    Wayne

    Reply
  2. Danielle,
    Love these write ups and reminders that we constantly have to look at the “big” picture of all the pieces to have winning trades!! Keep ’em coming!

    Reply

Leave a Comment

Up Next...

SPX 0 DTE: Part II

Hey traders! I posted a video on a neutral SPX 0 DTE strategy on Monday, and I had many questions, so I decided to do a follow-up video with a second example. In this video, I cover several questions, including the width of my iron condors, the length of time, the risk-to-reward, and more. Check … Read more

Read More

Trade Review: Using a Neutral 0 DTE SPX Strategy

  In today’s Trade Review episode, I cover a quick SPX 0 DTE trade from last Friday at market close. In this video review, I cover: Why I decided to make a bet that the market would trade sideways into the close How I analyzed the options chain and technical chart patterns Why I decided … Read more

Read More

Butterflies + Put Credit Spreads Combined

A Bullish Earnings Call Last week, in the trading room, one of our members requested that I analyze the ticker AAP. This ticker belongs to Applovin, a company I’ve never traded before. This find is a prime example of the collaborative aspect of the trading room, and it’s why I appreciate our dedicated traders so … Read more

Read More

Subscribe Today!

Want my up-to-date analysis, setups, top trading tips, and more? Be a Five Star trader, and join my free newsletter today!

Sign Up Now
all-as-seen-on-logos