A Step-by-Step Guide to Daytrading the S&P 500

Today I want to talk about how I use TradingMarkets Market Timing buy signals to day trade the S&P. When I come in each morning before the trading day begins, I want to have some sort of a market bias before I start day trading. On some days I have a clearly defined, or strong, bull or bear bias, and on other days I am a bit more neutral on the direction of the market. Either way, I want to have some opinion on where I think the market can go.

Let me make a clear distinction: I want to have an opinion on the market BUT I don’t want to be opinionated on the market. What is the difference? By having an opinion on the market, I weigh the technical underpinnings of the market to determine a probable direction for the market. I then look for clues in price action that will either confirm or refute my opinion. So in this case, I have a formulated opinion on the market but I look for the market to tell me whether my opinion is right or not. Being opinionated on the market is when you form an opinion on the market, and you are insistent that you are right even when the actual market is giving you clues that you are not right. In my career I have seen way too many people carried out or blown up because they kept insisting that the market or a stock HAD to do what they thought it should do.

Let’s go through a recent trade sequence to highlight what I am talking about. In chart 1 we see a daily chart of the SPY, which is the ETF proxy for the S&P. We see a market that has moved up quite a bit over the past couple of weeks, and at bar 1 on this chart we get an End-of-the-Month buy signal that triggers. Everything for me starts with the Market Timing buy or sell signals. These signals form the basis of my bull or bear bias. In this case, we see two end-of-the-month strategies trigger which are my favorite signals to trade. I know that my bias for day trading the next day is going to be slanted toward the bull side, so I will look for potential buy set ups to occur once the market opens.

In chart 2 we see a 15 minute chart of the SPY the next morning and notice that it has gapped down. Again, you know that we like to buy weakness so this is a potential set up for a great trade. In this case, the market gaps down and trades sideways for an hour. I mark the top of this pattern (highlighted in blue) and look for a break above this pattern for my buy entry. So here I have a bullish bias to the market and I have marked the area for a potential entry.

In chart 3, bar 3 we see the market take a huge plunge. Now this is exactly what we are talking about, we came in to the day with a bullish bias. We saw early weakness with the gap down and sideways trading. At this point we identified an area where we wanted to buy the market but we wait for the market to confirm our bias. Our opinion on the market is bullish based on the buy signals from the night before, but the market does not confirm our buy bias in this first hour of trading. (Notice that the first four fifteen- minute bars have lower highs and they are closing at or near the bottom of the bar. This is an early clue that the market is weak here which does not confirm our bull bias) Now that the market has broken this first potential buy zone, we need to look for the next potential buy zone. We do this by looking at a bigger time frame chart.

On chart 4 we see the SPY 60 – minute chart with several points highlighted. Points 1 and 2 were previous resistance areas. Point 3 also saw resistance and then a huge break out once that resistance zone was eclipsed. The actual resistance/ support zone is highlighted by the blue lines. This is classical technical analysis where the theory is that previous resistance when broken will become support. Note: I had already identified this as a potential support zone prior to today’s trading and had these blue lines highlighting this zone already on my charts.

In chart 5 we see the same 15 minute chart of the SPY with the same blue lines we drew on the 60 minute chart to show the previous resistance/ support zone. It is clear to me that the market is looking for the next support zone and I place several buy orders for the SPY scaling in from the top of the ‘buy zone’. At bar 4 on chart 6 we get a further pullback into the buy zone and 3 out of 5 of my buy orders are filled. I am now long 3,000 SPY at an average price of 141.35. I immediately place a stop right under the bottom of the buy zone (highlighted in red). I also identify at this point the congestion seen in the first hour of trading as my target zone. This target zone is highlighted on chart 7. I place sell orders scaling out of my entire position starting at 142.10- 142.30.

The market makes its way higher and at bar 5 on chart 8 the market blows through our target zone and we end up selling our 3,000 shares at an average price of 142.18. This is a perfect example of how I use the Market Timing buy signals to form an opinion on the market. I then look for the market to either confirm or deny my opinion and use the information the market is giving me to day trade the S&P. Also, this is a perfect example of being prepared and doing your homework on charts to identify potential areas of support or resistance well ahead of the current trading day.

Good luck trading.

Paul Sabo has been a professional trader for over 18 years. During this time he has worked as a market maker in both New York City and San Francisco for some of Wall Street's most prestigious investment banks, commercial banks and brokerage houses. Paul later became the head trader for a top-ranked investment advisor and hedge fund based in San Francisco. Paul recently left his position at the hedge fund to trade his own money as a full time business as well as working with Connors Research Group on various proprietary projects.

Learn more about this strategy in the "TradingMarkets S&P Market Timing Course". To listen to a free Market Timing presentation led by Paul Sabo and Larry Connors, click here.

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