We started the week red, but by Monday’s close, we had some positive breadth divergences.
Tuesday morning, I had a pretty good idea of how this was going to play out. I’ve seen it a million times.
The PLAYBOOK: The indices are in a downtrend. All the short-term moving averages are above price. Then, suddenly, we gap up, hold the daily VWAP, close near the highs, and stay above the short-term moving averages. The 5-day period is the most important one. Then a day later, we get a gap down that finds support right at the 5-day.
This is EXACTLY what happened Tuesday and Wednesday.
But here’s where I failed. Trump’s speech threw me into a loop. I didn’t follow the plan. I was convinced we were heading lower after that speech — and I let that conviction override the setup.
Price had other plans, and those plans were exactly what I had laid out.
This tape has not been easy. Trump holds the record for the most 1,000-point drops; I believe 13 of the 19 occurred during his two terms. It is what it is. When volatility runs hot, you play small until things settle down.
One way I track it: the 10-day Average True Range.
I want to see the 10-day ATR below its 5-day moving average.
Currently, we’re above.
Where do we go from here?
I don’t know, and we do not need to know.
My feeling is there’s more to come. More pullbacks. More vicious short-term rallies. And eventually, the market will discount Iran and the midterm elections.
The average peak-to-trough drawdown during midterm election years is roughly 17–19%. Don’t get caught up in the average decline — focus on what typically happens afterward.
Don’t get caught up in the average decline; focus on what typically happens afterward.
