Sunday Setup February 2, 2023
- Indices: Trending higher in a Bull Quiet regime.
- Metals: Gold, silver, and platinum are moving higher; copper remains flat.
- Energy: Natty in a Bull Quiet regime but is experiencing a big pullback after a failed breakout—waiting for long setups.Crude in a sideways neutral.
- Currencies: Continuing to trend lower against the USD.
- Bonds: Stabilized after hitting Bear Volatile and are now moving sideways. Looking for a potential bullish reversal.
- Ags and Softs: Ags are attempting to establish an uptrend.
- Crypto: Long Bitcoin, flat on all altcoins.
Choosing the right system for the market.
In any given market, across any time frame, we see technical action such as:
- Trends
- Breakouts that fail
- Big spikes up and down
- Trend reversals
- Gaps
- Large sideway periods
Each of these market movements reflects what has already occurred, offering clues about what might come next.
Take a market that’s been trending up for 20 of the last 30 bars. Traders will interpret it differently based on their perspectives:
- One might see the trend nearing exhaustion and trade the reversal.
- Another might view it as an opportunity to join the momentum.
- A third might find it unclear and choose to stay on the sidelines.
Here’s the fascinating part: all three traders could be right—and all could profit from the same setup. Success doesn’t hinge on the trade entry alone; it’s everything else that matters.
- Position Size.
- Time in the trade.
- The exit.
The reversal trade might involve a scalp held for thirty seconds, while the trend trade might involve holding for months.
No single trading style works across all markets, all the time. Markets are dynamic, and their behavior changes with conditions.
Think about it: during a -5% intraday “crash,” is the market calmly drifting lower on low volume? Of course not—it’s chaos, with heavy selling and frantic activity.
We can see this with NVDA last week, which was down -17% last Monday.
If you were watching it live, you’d see blocks of trades flying across your screen, reflecting intense market activity.
Volume would be significantly higher than usual, showing strong participation and conviction behind the price move.
Each one-minute candlestick would display a range of 0.25% to 0.50%, emphasizing the heightened volatility and rapid price swings. In less than ten minutes, the price could drop from $123 to $121—an aggressive move during what’s typically the quiet “lunch hour” lull.
This is the hallmark of a strong downtrending market: heavy selling pressure, increased volume, and sharp price declines.
In such conditions, short positions become highly favorable. Even if your timing was slightly off, the strength of the trend would likely bring the trade back into profit within minutes.
Just a week before the DeepSeek news rattled the markets, we were in an entirely different regime.
Then, the entire day’s range was just 0.50%. It was a calm, mean-reversion market where prices moved up and down throughout the session, only to settle back near where they started by the end of the day.
This highlights an important principle: different markets require different trading systems.
The goal is to identify the current market type and align your trading system accordingly.
In a trending market, it’s best to follow the trend. With larger price ranges, you’d reduce position size and use trailing stops to capture extended moves.
In a sideways (range-bound) market, betting on breakout failures is more effective, as prices often revert back into the range. Here, tighter ranges allow for larger position sizes, and it’s better to take quick profits rather than let trades run.
If you only have a trending system, it’s essential to find trending markets where your system works best, rather than forcing it onto a market that doesn’t match its design.
For example, let’s examine crude oil on the daily chart. Recently, crude appeared to break out of a sideways channel, surging from $70 to nearly $81 per barrel in just two weeks—a clear show of strength.
Then it turned and immediately went right back into the channel.
This is because the crude oil market has been in a neutral regime, which aligns with our mean reversion trading system.
Again, our reversion strategy capitalizes on price movements that tend to revert to their recent average, making it ideal for markets where prices fluctuate within a defined range without strong directional trends and where breakouts routinely fail.
Next week, crude oil could shift into a different regime, prompting us to adapt and trade using another system suited to that new regime.
The point being that our focus isn’t on predicting what the future regime might be—we trade based on the conditions right in front of us.
This is how we run our trading business: systematic, adaptable, and grounded in principles that endure through all market regimes.
Macro Regime Overview
Current Positions
Long ZN (US 10 Year Notes) – bear volatile reversal
Long ES (S&P 500) – trend
Long GC (Gold) – trend
Short HG (Copper) – mean reversion
Long GE (Feeder Cattle) – trend
Short ZL (Soybean Oil) – mean reversion
Target Setups for next week
In equity indices, I’m focused on finding the best-looking sell setups that are likely to fail.
Right now, we’re in a Bull Quiet regime—a market environment that trends higher in a slow but persistent manner.
These uptrends aren’t flashy, but they grind higher over time. The downward shocks, however, are sharp and convincing, making it feel like “this is the big one.” Headlines shake out long positions with big moves down, only for the market to recover and continue its steady drift upward.
When the trend resumes, those who sold out in fear of doomsday are forced to reposition long, adding fuel to the climb.
In this regime, price isn’t fragile like it can be at major market tops. There’s still room for the market to move higher as long as not everyone is positioned long. I’ll keep adding to my long positions here while managing risk carefully.
If indices shift into a Bull Volatile regime, things change. In that environment, price becomes fragile, volatility spikes, and position sizes need to be reduced. But for now, I’m sticking with the current trend and looking for opportunities to press my trades.
With the recent tariff news creating uncertainty, there might be more weakness early this week. But if strength returns and this “best-looking sell setup” fails, it’ll be our signal to increase position size and tighten stops. This is where I’ll lean in—capitalizing on the tendency of this regime to punish shorts and reward disciplined longs.
Concluding Remarks
Trading success isn’t about crystal balls or gut feelings—it’s about mastering market regimes and adapting your playbook to fit the game.
Markets are like living, breathing creatures. They shift between states—quiet trends, chaotic reversals, and everything in between. Each regime demands its own strategy, and the real edge comes not from predicting these shifts but from recognizing them in real time and adjusting accordingly.
Right now, we’re in a tricky environment. Headline risk is like a coiled spring, ready to send markets flying in either direction. Yet, beneath the noise, deeper trends continue to hum along.
This is where disciplined position sizing and rock-solid risk management become your lifelines. It’s not about being right or wrong—it’s about staying in the game and adapting as the rules change.
The best traders don’t force one-size-fits-all systems onto every market condition. They’re like Swiss Army knives—armed with a suite of tools and the know-how to deploy each one at the right time. That’s the beauty of systematic trading. It gives you a framework to spot regime shifts and respond with cold-blooded precision.
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