With 1-hour to go before the open, SPY is indicated to gap down below both the uptrend line as well as the recently highlighted “Island Cluster”, thereby potentially triggering a sell signal, should it close solidly below the trendline today.
SPY daily June 11th
Note: This is only a hypothetical candle that I’ve drawn in to show what a solid sell signal might look like later today. First, the major stock indexes need to hold or build on today’s pre-market losses in order to gap down & create the Island Top pattern. Second, that gap should not be backfilled by the close today or that pattern will be invalidated. Finally, regardless of whether the gap is backfilled or not, as long as SPY closes the day solidly below the trendline (and ideally, QQQ, DIA, IWM, & MDY below their respective trendlines as well), a sell signal will have been triggered. As I like to say regarding the candlesticks on a breakdown/sell signal; the redder the better.
All other major stock index trading ETFs (DIA, QQQ, IWM, MDY, etc..) are also currently poised to gap down below their respective trendlines and potential Island Cluster (multiple) candles other than QQQ, which is currently poised to put in an Island Top (an Island created with a single candlestick vs. a cluster of candles) on a gap down today. QQQ is currently poised to gap down on or just below the yellow uptrend line, putting in a potential Island Top. As with the SPY chart above, this is NOT an actual candlestick, just a potential candle that I’ve drawn to show what a solid sell signal on QQQ would look like, should QQQ close solidly below the trendline.
QQQ daily June 11th
My strategy for trading Island Tops & Island Cluster Tops is fairly simple. Short following the gap down with a stop placed anywhere from about 1/2 to all the way up to the top of the Island candlestick or the Island Cluster of candles, usually about 3/4th of the way up & in this market, ideally on a closing basis vs. an intraday basis to help avoid have the stop clipped in stop raid, as they have become increasingly common in recent years.
As the name implies, Island & Island Cluster Tops are topping patterns. As such, one might opt to sit tight on any short position that starts to pan out with the intention of positioning for a multi-week or multi-month swing or trend trade, for the time being, assuming that we finish the day with solid sell signals across the board. With that being said, up until this week, the trend in the broad market has been extremely bullish and as such, we may only be looking at a relatively brief & minor pullback. As such, I will follow up with some near-term pullback targets for those interested in buying the dip or booking quick profits on a short trade.