SP500 trading

OVERVIEW OF THE SP500

The following discussion refers only to the SP500. Stocks will be discussed separately since they behave so differently. It takes days or weeks for stocks to move to their vibration points. In addition, there are far fewer support & resistance points, which is a good thing. Stock trading is much less complex than trading the SP500. The SP500 is harder because there are a greater number of outcomes possible due to the speed at which prices move out of one ten point range of prices and into another ten point range.

A stock will take weeks to move from 98 to 90. If a support point is at 90, the stock will likely have a decent bounce off the support point. On the other hand, the SP500 will move that far in a day (1198 to 1190), and maybe rise only a few points or not at all if the daily low has not been met yet.

On the SP500, there are many support and resistance points calculated by this technique that are sensitive to the movement of prices when touched. The fractal nature of the market is such that not only does the Starting Price of an up trend determine resistance points, but the higher lows also are determining resistance levels. In fact, the main starting point for a day's Support & Resistance points is the most recent low that day or the day before. In other words, the most recent occurrence of a pivot as gleaned from a chart of prices is most useful for figuring an array of higher prices that will more than likely be either a support point and/or a resistance point that day. That statement explains more about the method than meets the eye.

The question of what to do with all these resistance levels can be an enigma itself. Rules have to be made. A trend needs to be determined and that is difficult many days due to multiple trends in a day or just a choppy session. How one perceives the trend of the day has much to do with the success of one's trade, even with Gann's true Square of Nine method that he unknowingly left for us to find in the1909 article.

On a day to day basis; one can trade with the trend, scalp against the trend, or look for trades that reverse the current day's trend with this tool. In addition, there are some algorithms that, when combined with other algorithms, give the best chance of identifying a reversal of price at either the possible high/low of the day or being a major turn in the day. I refer to those models as an On Date/Start Price algorithm. Those are the best type of trades to do when trying to trade opposite the day's trend.

There are several Range of the Movement algorithms on the Square of Nine for the SP500, once two variables are known. I wish only one variable was necessary, but that's the way it is. Having an idea of the day's range or current fractal movement is useful, but by no means is the range something that has to occur exactly as drawn up. There are multiple Range of the Movement algorithms in each trading session. The two variables are the date and either the high or the low of the fractal movement that has already been set. Combining this algorithm with a possible high or low of the day On Date/Start Price algorithm is a set-up for a possible trend reversal. On the following page, I have included a chart of what these algorithms look like on a daily basis in relation to the price movement.

For the SP500, there are multiple day trades possible, but the entry points aren't necessarily clear without first correctly figuring the latest or current trend of the day.

A key rule is that a calculated resistance point is better used as a support point to trade with an up trend than as a scalp against the trend unless the resistance point is perceived as the high or low of the day's range. If the latter is the case, then using the resistance point as a trend reversal point is the best plan of action. This rule is also shown in the hypothetical three day chart that follows on the next page.

An example of trading with the trend is shown in the chart below on 11-22-04 (with the Gann method). One could calculate one resistance level at 1171.4. Earlier in the day, 1171.75 was a top. On the chart below, note how a small set of bars hovers just below 1171.40 before dropping at point A. This is a clue to the actual exact sensitive point. Gann always talked about prices going a little beyond where they should sometimes. Prices dropping below the resistance point and nudging back up to the level again is an entry for a short sale with a one point stop. This trade ends up being just a scalp trade as the market does not want to drop any further.

The day is choppy early in the session and the price is near a low set at an important support point of 1166.5 the day before. Later in the day, a sudden fast move commences and 1171.40 is broken and exceeded by .75.

This is the clue that the trend is changing to an upward bias. This is the Water Table Effect. Now the calculated 1171.40 point can become support for the new intra-day trend to the upside. Note on the two minute chart how the reaction low occurs at 1171.25 low before price takes off to the upside.

The second time price penetrated the resistance point by .75, it used 1171.40 as support, giving the trader a buy entry at 1171.50 with a 1-1.25point stop. All the support and resistance points work in this manner. The calculated points can be support and/or resistance, depending on the latest trend. The trader has to make a choice as to the trend. The Water Table Effect is of great assistance in making the trend direction choice.

This is a example of how the basic method works on short-term trades in the SP500. Successful short-term trades become successful longer-term trades by taking some short-term profit and holding some position for possible larger gains.

I like to use the analogy of the market behaving like one giant pin ball machine. Inside the machine are all these walls that the pinball ricochets off, causing the ball to move on to the next wall it encounters, bouncing off it and continuing on its unknown path until the ball finally losses momentum and drops back into the machine. The calculations using Gann's method on the Square of Nine are showing where the walls are, not whether the pinball (prices) is going to hit them-because the ball movement (price trend) is mostly unknown and random by nature.

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