The One Thing to Prioritize for Morning Gaps on SPY

Today marks a positive result of the current Trade War with China. U.S. stocks surged after a 90-day U.S.-China tariff pause slashed tariffs on Chinese goods from 145% to 30% and U.S. goods from 125% to 10%, boosting the SPY around 3% this morning.

With such a big move in the markets, it will take patience to wait for a solid trade. Depending on price action, we can either pull back and continue the strength upwards, pull back and find support, or continue sideways and consolidate today. It is unlikely we will just spike and come right back down to the previous session's price.

These days, it is paramount to remain unbiased and wait for price action to reveal what it wants. Today, we had a nice pre-market reaction zone around the 580.50 area that confirmed on the 2-minute with two touches. This was my ideal play for a continuation play. However, we did not get the momentum or acceleration needed for the breakout. We needed to hold above VWAP and have more buyers step in for the push above pre-market highs.

Instead, we got a push through an intra-day reaction zone that formed near the lows. We pushed below VWAP with solid price action. Once we broke the low of the reaction zone, I entered puts (green circle).

The Setup: Intra-day Reaction Zone (RZ) Breakdown

Once the price hit my 10% profit target on my trailing stop, I immediately adjusted my trailing stop to 5% to lock on at least 5% profits on this move.

I exited my trade for roughly a 10% gain. Since we had a one-hour reaction below this intra-day reaction zone, there was a possibility of some resistance/bounce as we approached that level.

Overall, my goal was achieved today. My focus is on making one solid trade per day if the opportunity arises. As I am writing this, we are currently bouncing off that one-hour reaction zone and are now above VWAP. We will likely re-test the reaction zone of 580.50, but since my time window is about finished (8 a.m. PST) and I have already traded, I am done for the day.

With such a huge gap, price action fits into the category of sideways price action/consolidation. Patience and waiting for price action to form the reaction zones were essential for success today.