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Right here, when it bounced off of support, that was on May 18-19. It was a Friday and a Monday. Let’s see where the Dow Jones Industrial Average was, on the 16th and the 19th. There’s the 16th, right here. That’s the 19th. The 19th is the exact day that it bounced off the support point. At that point, we could have determined that lower prices were coming in the market.
It had touched that support point and closed above it. That’s exactly what happened to the volatility index, from that point forward.
In other words, I use the volatility index as a confirmation of what I’m looking at, in the markets. I see a flag pattern beginning to develop here. I see the volatility index coming down into a support point. Also, there was a resistance point here that was extremely significant, because prices declined from it. I have that on the price, I have that on the VIX.
To say that there’s a high probability that prices were going to decline at this point, is an understatement. It was extremely high probability that prices were going to decline dramatically from that point, and they did.
Here we have this little flag, on prices. We have a little flag on the VIX. Prices continued to go up. However, we meet this resistance point here. There is a little resistance point here that was established here, and it was established again here. Here, on this particular day – which is this day here, where this tiny thin candlestick was – it closed below that particular resistance point.
This resistance point was not the first time it was hit. It was hit here, it hit resistance here. It was somewhat a resistance here. Remember, the more times a particular price is formed as resistance, the more significant it becomes.
What happened was, when this price right here closed below that resistance line, there was an extremely high probability that in fact, the market was going to rally sharply. That is what formed my opinion for a daily review that I did on June 5. I had formed the opinion on June 4 that the market would rally sharply on the morning of June 5. I established a long call position, and created a three-legged box during this time period here, during this up-rally. There was a high probability that the market was going to rally, at this point.
The volatility index, in conjunctions with patterns that you can see, support and resistance and flag patterns that you can see, continuation patterns in the market, really form a very strong package. You cannot predict prices, but you can determine the probability that a price will move in a certain direction.
That’s that I am trying to get across. Support and resistance points are extremely important. Identifying continuation patterns, such as a flag, is very important. So is using that information in conjunction with the volatility index, the VIX specifically, to determine the probability of future price movements.
At this point right here – once you have a large bar like that, you have to wait a day or two to determine whether or not there is going to be a continuation pattern forming. At this point – let’s say that this is today’s market. For me it is, but you may be watching this video in the future. At this point, I would wait. It’s a large bar. I would wait for prices to decline slightly.
If prices do not decline slightly, but continue the up pattern, I would expect that it would probably come back onto the 16 level, and test this support point. If not, and if prices began to gradually form an up-trend, just like they have here – prices gradually form an up-trend, before continuing lower – then, if we had that, I would feel very comfortable in the fact that the market would probably continue on its upward trend. As far as the Dow Jones Industrial Average and the major industries.
We would have to see two things. We would have to see a gradual increase of prices on the VIX, going up this way. We would have to see a gradual decreasing of prices down this way, for the Dow Jones Industrial Average, before the trend would actually start to continue.
As long as the prices do not break these lows. If we have a slow, gradual decline in prices, and as long as they do not break this low. This is becoming a significant low, and a significant support level. Then, we should be able to continue the upward trend, at least for the time being, and maybe get back up to this resistance point again.
Right now, it looks like there is support down here, in this level. There is resistance up here. We’re kind of in this trading range.
The two of these together actually make a very firm foundation for any type of trading on a swing period – maybe a 1-3 day period that you want to trade in. They are also excellent for looking at establishing iron condor positions.
Once you have a very large up-move like this, and possibly tomorrow, if we have another very large up-move – at that point, it is an excellent time in which to establish an iron condor. You will probably get something similar to this. A gradual decline of prices, after a very large upward price movement.
Prices need time to consolidate after these large price movements. Those are good times to establish iron condors. You know the prices are probably not going to move significantly for at least the next week. During that week’s time, you can generate some significant returns with iron condors.
You can also generate some other types of returns, using Theta positive trades. During the week that we establish our monthly trades, it’s always good if you have one of these large up bars or down bars before establishing your position. You will have a greater chance of sideward price movement, at least in the initial stages of establishing your monthly trade positions.
This is a very dynamic way of providing some sort of probability analysis to future price movement. The combination of actually taking a look at price movement, as well as taking a look at the volatility index. Using this type of method of establishing some probabilities, you’re not going to be fooled very often.
Every once in a while, you’re going to get a flag like this, where the prices just drop right through it. But once you realize that they have hit some sort of support level here, and they bounce off it, you can again feel confident in the fact that the up-trend will continue.