Last night I decided to wait for the market to show me how it would trade. So I waited until the morning for the first five to ten minutes to see. My thinking that since the market would open already 2.5% lower would not provide too much space for further downtrend showed up as correct. SPY opened at $114.39 and since then it was growing and by the end of the day it erased almost all losses. Maybe I could open some call positions, but I wasn’t sure which way the market would go.

And there is a rule – if in doubt, stay aside. So I did.

Right now I can see the market showing a few different signals which is preventing me from opening new positions:

Signal 1 – we are finishing an ABC correction.

Signal 2 – we are forming bearish pennant

Signal 3 – we are reversing the trend and creating new higher highs and new higher lows – a new bull trend is beginning.

Well, which one is correct now?

See the chart below in which I am showing all three possible scenarios:

I marked the ABC correction with letters. I am also showing the pennant with magenta lines and the new higher highs and higher lows are shown with green and red arrows respectively.

So how to trade this? I still do not know where the market will go and thus I am waiting for confirmation. If the market breaks lower (breaks the pennant) it will be a sign that we really finished the ABC correction and we will continue further down (which I think we will go). If however the market turns back up and continue into new higher highs, I think we may see another bullish trend. So I will be waiting.

Basically if SPY breaks below $114 and $112 levels, we will continue in a downtrend, otherwise we may see a new bullish trend.

The same thing is with Chinese FXI ETF which I am ready to short (buy puts), but only if FXI breaks down below $35.90. If FXI continues up I will wait for the next opportunity.

Happy trading!