Shenanigans in ES require more vigorous analysis -BOTH ES futures and SPX charts

Due to the shenanigans lately in the ES futures activity during the 4PM to 9:30AM overnight session, I will now start evaluating BOTH the SPX and ES charts. I have been evaluating both all along, but a more vigorous discipline needs to be put in place.

Why? Because the SPX reflects what ACTUALLY happens with stocks during trading hours, which is directly related to the ETFs as well. The ES activity is causing several surprises in the SPX with gaps. Now we know this is nothing new. However, making trading decisions based solely on the ES is tricky, because often the analysis will be correct but unactionable due to the overnight sessions of the ES futures.

As a simple example, yesterday the ES was showing a perfect setup for a retest of the 996, which I suggested would happen, and it DID happen during the overnight session. You can review the timestamps and see that my analysis was posted before the actual decline.

However, the ES pivoted off the 996 during the early morning and the day opened at 9:30 with a powerful upside advance. Now on Thursday I entered a swing short positions around 1005/07 in expectation of a test and possible break lower of 996, with the expectation of locking in profits at 996 or lower if it broke. But because the test of 996 occurred during the early morning ES trading (pre-market before 9:30), a double low formed overnight, the SPX gapped up, and I was stopped out of what should have been a good swing trade.

Now this is not an excuse, just an observation and explanation of what happened. Even with the more rigorous approach of using both ES and SPX, losses will occur as well as profits. The key is accepting the loss, getting stopped out, and moving on. Also key is choosing the right size position so that any losses do not wipe out the portfolio. Many times traders enter positions that are too large, and they incur large losses as a result. That's not good risk management. The approach that I advocate is to choose a position size (i.e number of shares of stock and dollar amount invested) such that if I incur a LOSS, that loss is not more than 2% of my portfolio. So, if the portfolio account is worth $100,000, the loss should not be more than $2,000 (or $200 loss for $10k portfolio, or max loss $20,000 on $1,000,000 portfolio size). Note that this does NOT mean that we need to set our stop at a 2% loss. We can enter positions with a stop set at 4% lower, AS LONG AS the dollar amount doesn't cause more than a 2% PORTFOLIO loss.