The markets stumbled into a bottom signal. The sentiment indicator entered the warning signal on Jul 2. It was a waiting games for a volatility pop. The pop was very disappointing. On Jul 9 the vol indicator hit the upper band. From that point, we wait for a trailing stop violation. That occurred on Jul 16 at 1236. The chart shows the signals.

I have been reading this blog for a couple weeks. It’s called Quantifiable Edges. He has some great posts and research. I highly recommend that you subscribe.

The SP500 finally broke a trailing stop at 1236 yesterday. My position is flat. I am not going long but I think a bottom was established. The vol spike was disappointing. This break was steady but not a vol explosion.

It’s time for an update on my long SP500 put position. The SP500 closed at 1262.80. I’m long the Sep 1275 puts. The delta is up to 0.55. That means it’s 55% of a full short position. The sentiment indicator hit the lower band with today’s close. Small cap stocks in the Russell are taking it hard in the last week. This is the first signal of a potential bottom coming. Thursday is the June unemployment report.

The Gameplan

1. A rally. I will cover my puts if the market trades above 1293. That is the high for the week. A move above there could be the start of a meaningful bounce.
2. Unchanged .I’m hoping for a big jump in the unemployment rate. Last month, the market had a big selloff on the unemployment report after a lackluster open. If the market trades in the unchanged area I will let it develop and use a trailing stop of the previous day’s high.
3. Big gap lower. If the market opens on a good gap lower I will sell 50% of my puts in the first 30 minutes.

The market will not stay in this area for long. I anticipate a big move that will spike the volatility range indicator in the next few days. It could be a rally or a selloff so I want to give it some room to move lower but I will be aggressive if it moves higher.

Toby Crabel wrote the first book about short term trading with filters. His book Day Trading with Short Term Price Patterns with Opening Range Breakout detailed his research. It is the bible for short term traders. His book is in very short supply. Amazon only list three for sale with $665 as the cheapest one. Toby Crabel now manages several billion dollars at Crabel Management. Rumors circulated that he was buying every available copy so that he could put the cat back in the bag.

Range Expansion and Contraction
His main thesis was that the market has periods of range expansion and range contraction in volatility. After a period of range expansion, the market needs some time to digest it’s movement. Typically, the price action is choppy as the market establishes a new equilibrium. Breakout trades after a period of range expansion are less successful. They typically have lower win % and lower average wins per trade. Conversely, after a period of range contraction the breakout trade has much better performance statistics. The secret was to define those periods of transition.

The Crabel Filters
Toby focuses on short term trading. The holding period is most often intraday or as much as three days. He began researching a filter to identify the range contraction period in the market. He focused on the daily range.He tested many variations but found a few good filters. He classified days by their range characterisitics. He labeled them by the number of days and the volatility component. For example, his first was the inside day. An inside day is when the complete daily range is within the previous day’s range. After this condition is met, a breakout from the recent trading range has better winning statistics.This chart has the inside days highlighted with the show me red dot.

NR4 and NR7 Range Days
He also identified a few more filters. He called them the NR4 and NR7. The NR4 means narrow range 4. An NR4 is a day that has the narrowest range of the previous four days. For example, the SP 500 had a NR4 day on Jun 23. The daily range of was the lowest among the previous four days. A NR7 is the narrow range 7 which is a day that has the the lowest range in the previous seven days. The charts have dots next to the NR4 and NR7 days.

Next we will explore more of his filters and how to incorporate them in your trading.

I covered my short calls previously. Today I bought in 50% of my short put deltas. I am long the Sep 1275 puts from our divergence signal. We have over 100 points profit in the SP500. The SP500 traded higher than a previous high today. Also, Wednesday is a FOMC meeting so I’m locking in some profits

I bought in my short Sep 1545 calls on the Sep 1275P 1545C risk reversal during Friday’s action. I also bought is some of the short put delta. We may get a small bounce from these levels.

Our short signal was activated this morning on the open in the SP500 at 1395.75. We had a low Daily Average True Range and a High Russell SP500 spread. The signal was activated when today’s open was below Friday’ low. The chart below shows the indicators.

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