Market Replay is a hypothetical study that explores how a given market might have been traded using a strict price action-based approach. Some trades might have yielded favorable results while others might have been less favorable. We reveal both.


SPY 15-Minute Chart – August 29 – 30 (August 30 shows between the two vertical lines).

SPY-300x155 Day Trading Strategy: Market Replay - How You Might Have Traded SPY on August 30

Day trading is always a risky endeavor. And when potentially favorable setups present themselves, it’s important to analyze the “big picture” before placing any trades.


Today, August 30, the S&P 500 ETF “SPY” presented a strong indication for a potentially favorable short sale.  


If you were preparing to trade the SPY before the opening bell at the NYSE, you might have noticed a couple of “classic” indications (not that all classic indications are correct, but they signal potential for a given bias).


First, the end of yesterday’s session ended on an uptrend as you can see from points (1) to (3).  If you happen to use the Relative Strength Index (RSI), however, you see that the movement from the “overbought” levels trended downward, diverging from the actual price movement (2).


When the market opened, it opened at a gap lower than yesterday’s close. Not only did it gap lower, it actually broke “support” at 291.14 (see blue arrow). This might have been considered a potential “breakaway gap.”


Gaps are often retested. But in this case, weighing the RSI data against the price action, the bias might have been bearish, calling for a retest followed by a continuation move downward. If you shared this bias, then you might have shorted SPY at the rest of the gap at (4), placing a stop loss a few ticks above the high at (3).


Another entry point would have been a break below the most recent support (swing low) at (5), in which case you might have placed a stop loss a few ticks above (4). Either way, none of the stop positions were taken out and a short from both entry points would have given you a positive return by the end of the day.

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