Surviving this Sell Off.
Weekly Plan 3.10.25
Good morning traders-
If there is one lesson to be had from last few weeks’ of market action, it is this- learn to think in probabilities. Do not freeze with fear. Have a stop loss. Trade whatever you are comfortable with and nothing that makes you lose sleep at night.
I cannot stress enough how important this probabilistic thinking is.
For instance, on Thursday I shared 5660 as a support level and a 5850 potential gap fill. Why did I say 5660 could be tested and could be supported when we were at 5770? This was before a 100 dollars drop into 5660 and about a 150 dollars rally from 5660, all within a matter of 24 hours?
Because I have analyzed auctions going back 20 years. This is 5000-6000 auctions which I have analyzed where these gaps tend to get filled on balance, and farther you get away from such gaps, lower the risk to reward becomes. I don’t do analysis during the session, I have already done the work.
The Highs and lows of these auctions are super important. What are the highs and lows anyways, in plain English?
These are 2 prices out of day’s hundreds of prices, where no one was willing to bid or offer a single tick above high or below the low. What do you think it means when a market is making new lows and no new highs? What does it mean when a market is making higher highs and new higher lows? These are important auction concepts.
I am sharing my core thinking process when it comes to deriving these levels (for educational reasons). Hope you take notes.
For instance, look at chart A below. I am sharing a chart to show my thought process though know that I see the same information on a Level 2 Depth of Market window.
This is a Daily Chart. Look at these 2 Green candles. Why don’t they close near their lows? So obviously there is presence of buyers here at these lows, this is why we see these type of moves. Now what happens when we visit the highs of that first Green auction in Chart A? Can we expect some reaction there?
You bet.
Will it be a 100% profitable trade if we sold at the high of that first green candle?
Nope.
So based on my analysis going back hundreds of thousands of auctions, there is a 90% probability we will have a test under the high of that prior auction, with further 70% chance we will not have a current auction high of more than a few points above the high of the previous auction. If I placed a short 10 points above the highs of current auction, if tested, I have about 70% odds of this being atleast a 3X profitable trade. This is minimum 3X, but in some cases this could be as much as a 5-10X trade! Now note I have no idea if I will lose my 10 points or not, if I get stopped out, but I know that there is a 70% probability that I will atleast end up with 20-40 points, minimum.
What if we retest the lows from Friday next week at 5660? Similar probabilities of a bounce with a 8-10 point stop.
This is based on analysis of a thousand plus auctions. This is what happens on average but this does not happen every single time.
Let us say we get an Outside Day or a Bullish engulfing action on Monday. I assume most of you already know what an Outside day is but please just Google it, if not sure.
There is a 65% probability of the next day being Green.
If I bought the low of the outside auction, with a 10 point stop, and I potentially can get 3-4X my risk, about 63% of times, would you call is a decent risk to reward or not?
Is this a bad deal? Asking for a friend here.
Do you need to predict what the market will do next to have a 70- 80% probability of making some money? So you see why such an analysis done upfront can give us confidence when levels like 5818 or 5660 are trading instead of being bamboozled like other furus going crazy with heads and shoulders or moving averages in middle of the trading session? We have already done our homework, and we have the probabilities in our favor. We do not need to predict during the session. Just mark down your levels somewhere on the chart and react to them, instead of doing analysis in middle of the session!
Some food for thought there.
Now when we talk about bottoms or lows in intraday time frames, their context is in that session alone. It takes special talent to play both long and short side as most can’t divorce their minds from their long or short bias to trade the other side.
While these markets remain extremely over valued even here at these levels, this does not mean we cannot see a couple hundreds of rallies here and there.
Once the dust settles, new highs will be made again. The so called “Trump Pump” is not dead yet. It will come to those who can be patient and can protect their accounts. Once the markets firm up again Orderflow will be the first to note it and we will send the confirmation to our subscribers.
So how to survive this sell off?
This is a little dramatic title for the post, but you must take this in proper context of your time frame. If my time frame is from hours to days, know that this current volatility in the indices is extremely rare. This is NOT normal.
At the same time, this is an extremely good time to be active as a day trader. If you are right, how many times we are seeing your long or your short rally or dip 40-100 points within a matter of minutes? This does not happen often, it is extremely rare.
For any one who is a longer term investor, this could be a blessing and a curse as well. Now these 5-10% drawbacks are quite common. It happens on average once or twice a year.
What is more rare in longer time frames, in the US markets, is a pullback of 20% or more.
Let us say I had a 100K stashed somewhere in savings or money market funds. I thought 6100-6200 is just not a great level for me to deploy cash. Now essentially in every sell off you have a gift from the heavens for me to start deploying some of that cash, 5% here, another 5% there.
Below are some of really great ETFs for me to do this with (I am not including any mutual funds in this list as they tend to be a little painful to get in and out, but most of these have mutual fund equivalents as well)-
SCHD
SCHG
JEPI
JEPQ
VYM
VTI
There are others but I like to include the most liquid and lowest cost ETFs in this list.
In single stocks, as far as growth goes, while when this sell off ends is anyone’s guess, I think below names are exhibiting relative strength and once/if this market finds footing, I think they should be primed for moves higher.
But let me first share my personal views on where this market is in terms of long term structure as well as some thoughts on how I view optimal number of stocks to own.
I think 10 positions at any given time is a good number to aim for. If you know what you are doing, you dont need more than 10. If you dont know what you are doing, having 1 or 20 doesn’t matter.
Your portfolio is like your garden. You plant high quality seeds, you prune out the weeds, you let the good ones grow until there is a reason to take them out and you add to it. Bear markets are like winters. You let winters pass before you add any thing new to your portfolio.
Number of stocks has got nothing to do with size of profits. Even with one stock you can make profits much larger than someone holding 40 stocks. In markets and life there is nothing superior or inferior. Everyone and every aspect is equal. For some one to be superior, someone else has to be very much inferior. For some one to be very rich, someone else has to be very poor. You get the idea.
Instead view the world in references or in relative terms. Most of us give more weight to recent events. So since we were trading 6100 only last month, therefore 5600 is a low price. Since Costco was at 1100 almost last week, so 900 must be a good price. Don’t get blinded by recency bias. Know that Costco once was a 150 dollar stock not a handful of years ago. Don’t forger S&P500 was at 1800 when Trump first won in 2016. And it was at 2200s only a handful of years ago. Let the market firm up. Let other larger traders make their moves and then you just follow them. Shadow them.
Because it is like this you see, an Oak tree is simply an Acorn’s way of becoming another acorn. A chicken is an egg’s way of becoming another egg. Imagine a Chicken prancing about thinking it is superior to an egg, where it is just an egg’s way of propagating into more eggs. Once you get the concept out of absolutes out of your mind and you begin to think in terms of references and relativeness, you will begin to develop a whole new way of looking at things. One that is based on truth and not opinions.
Let us look at some stocks I like and some S&P500 levels for the week now.
HOOD
Robinhood unwittingly gets to clubbed together with the whole crypto space but I think this is much more than that. I view Robinhood as a whole financial ecosystem and it may be what Twitter or X wants to become one day with finance.