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Wednesday, May 2, 2012

To Scalp or to Swing?

reprinted from


Yesterday’s Bat pattern reversal we expected confirmed this morning.  SPX, currently down 7.42, was off as much as 11.90 just after the opening.

Bat patterns complete following a .886 Fibonacci retracement of a significant move — in this case, the 1422 to 1357 drop from April 2 to April 10.  88.6% of that drop was 1414.97, and we exceeded it just slightly before the market reversed course at 1415.32.

Cash short positions established at 1415 were up almost 1% this morning.  At-the-money puts bought when SPX hit 1415 were up at least 100%.    If you bought a few, congratulations!  Your pebblewriter membership just paid for itself.

The tricky thing with harmonic patterns is how much of a reversal to expect.  Some harmonics traders, therefore, practice scalping — establishing a position just before the expected reversal (with appropriate stops) and taking a profit shortly after.  This can be very profitable and, if done properly, entails little risk.

The other method is to use these reversals to establish longer-term swing or momentum trade positions.  This method works well if there is a reason to believe the position has more room to run; i.e., other chart patterns or technical analysis hint at a continuation of the new trend.

If you’ll indulge me, I’ll walk us through my thought process.  It doesn’t always work, but it provides a useful framework for the scalp/swing decision.

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