In the theme of our there is nothing to do on huge break out days, you need to be patient and wait for the rally to fade and invariably it does. The 200 ma Fade, a shortened colloquial name for a fade to the 200 moving average is where the price tops out and then reverses back towards the 200 moving average or to a previous price support level.
Martin's 1st of June 2023 SPX 200 ma Fade
Paradoxically, traders that fight prevailing market trends generally suffer negative consequences; that's the short of it. However, there are specific moments in time when market sentiment will shift — if you are open to and sensitive to the right signals and ready to move tactically of course, you may find the 200 ma fade is a significantly profitable setup to trade.
To be successful with this trade setup, as with so many things in like, the trader must remain patient. Leaping in ahead of the tactical moment to enter will result in poor outcomes and losses.
Martin Davies | Causal Capital
It's always easier to get involved in any opportunity when you understand why a specific market phenomenon happens and so it is with the 200 ma Fade. In effect, traders, investors, retail day traders, just about everyone has been buying into the rally all day and the big boys will hold their positions open until a specific supply zone is reached. This place is normally a recent price point of interest or resistance level and once the index reaches this level, the big guys take profits. That taking of profits results in selling down action that then drags the index lower into stops and so it goes, the price of the index will roll over until a fair value price or support level is reached.
If you are interested in this strategy or other trading opportunities Causal Capital is working on, please reach out to Martin Davies on his email [LINK].
Factors in play
The 200 ma Fade doesn't happen every day, so before attempting to try out a reversion trade, make sure the following factors are in play.
▨ The day has aged ➜ traders are ready to take profits.
▨ The price action is topping off and is close to a recent (last couple of days) topping point of interest ➜ traders have been targeting this location, waiting for it to be reached and will often buy and hold until that specific narrative target is met.
▨ The price action should have already broken the 8 and 21 Exponential Moving Average more than once, become entangled with the 50 moving average several times, even attempted to break the 50 moving average and failed.
▨ There is a separation of the topping location where the price is behaving from the 200 moving average.
▨ An evening star candle formation presents itself.
Before these factors are fully aligned, you will be ready to execute the trade; you will have identified a suitable option strike and have it dialed in on the trading platform, you'll be trade defined and planned, ready to go in your playbook. You need to be mentally bought in as a trader so that you can act effectively given either a positive or negative outcome, and all of this will be agreed in your head ... then the signals align, and we fire the trade in, uncertainty plays out and you'll either be rewarded or walk away with a defined loss, it can go either way.
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