The 8171 to 4983 is the largest magnitude .618 for this market. This is also the area that offers the greatest probability as far as a general market reversal is concerned, the question is how do you position yourself for it?
With the kind of momentum that is driving price, the best thing to do in my opinion is to wait for larger formations to unfold over time before continuing to build longer time horizon positions.
Often, the first leg of a major reversal is extremely sharp, which needs to be followed by a shallow pullback and then break of a previous peak. In other instances, this market has been forming the attempt at a reversal, but no previous peaks have been taken out.
Buying into lows like the kind apparent at the moment offers great prices, but as you can see the risk is usually high so this type of positioning is aggressive. While waiting for a solid reversal formation over time will require a ton of patience. Patience means watching price spike higher quickly and then waiting a number of days for it to prove that it has found strength by retracing to a higher low, then going higher and taking out a previous resistance. A key level to watch to help confirm that momentum has changed to on the short term, is a close above 8427 which is the .382 resistance of the current swing. That level serves as the target for the initial reversal swing.
I look to incorporate both situations into my strategy which means there is pain involved. I do not mind being aggressive as long as I temper that buying with careful sizing. The worst thing you can do at this point is flip and become a bear in an area where price has a greater chance of reversing. This is a buy or stay out type of situation, it all depends on how much you are willing to risk.
In summary, all strategy aside, the most important thing you can do in a situation like this is stay focused and follow your plan. If you have lost a lot more than you imagined, the best thing you can do is turn that loss into a lesson and gain experience from it, otherwise it is a complete loss. Trading is not a game of matching wits, intelligence or "being right", it is a game of controlling risk. Losing, no matter how uncomfortable it is, is just as much a part of the game as winning and we either embrace it and turn it into experience, or we can give up and let it win. Being fearful at lows is no different than being euphoric at highs. Just like I wrote back in December, markets do not move in a straight line and the same applies here as well. Extreme conditions offer opportunities for those willing to accept the risk.
Questions and comments welcome.
1. "The most important thing you can do in a situation like this is stay focused and follow your plan." This is always true regardless of what the market does. It's hard enough to predict what it does next, so you better know your move when the market has made its move.
2. "If you have lost a lot more than you imagined, the best thing you can do is turn that loss into a lesson and gain experience from it, otherwise it is a complete loss." No comments needed!
3. "Trading is not a game of matching wits, intelligence or "being right", it is a game of controlling risk." Yes, if you do not preserve your capital, it's game over. Rist comes first!
Thanks again, @MarcPMarkets!