The V-shape recovery in the stock market has caught many investors offsides...

Particularly for investors who sold equities b/c of the unwind of the Yen carry trade or b/c they believed the labor market was cracking.

A few important things to note here:

1. The recovery has almost been as swift as the selloff from the all-time highs in mid-July, with the decline lasting for 92 trading hours and the recovery currently at 104 trading hours.

2. The breakout above the anchored volume-weighted average price (AVWAP) from ATH's occurred on August 13th. Objectively, this was a line in the sand for investors to re-enter the market if they got shaken out. The index has gained an additional +4.15% in 10 trading days since breaking above the AVWAP. You'll also notice that it's upward sloping, indicating that investors since the ATH print on July 16th are continuing to raise their cost basis.

3. The anchored volume profile (AVP) from the ATH's has traded the most volume around 5,400 for the index. Breaking above that level on August 13th was an important accomplishment, for the same reason as the AVWAP analysis.

4. Given all of the follow-through days that have occurred for the Nasdaq Composite (4 of the past 9 trading days), the continued expansion in new highs on all three major timeframes, the absence of new lows, and the widespread nature of the market uptrend, objective analysts, investors, and traders must operate with a bullish bias in the current market environment.

5. If the correct bias is to be long and bullish, then the hard work is already done... which means that investors just need to focus on mitigating risk in the event that non-bias outcomes prevail. In other words, if our bias is wrong or unfounded, how do we control risk and minimize our punishment/cost if we're wrong.

The beautiful thing is that the tools we used to determine our bias can be used to control our risk and minimize our punishment.

Therefore, if the S&P 500 falls below 5,400 and crosses below the AVWAP or the POC from the AVP, then that would be a sign of weakening market conditions and losing key psychological levels.

That's the line in the sand:

If we fall below 5,400, bad things might happen.

If we stay above 5,400, good things should happen.

And here's another thing... if the market falls in the coming days and inches back towards 5,400, then our risk/reward calculus improves significantly.

Here's what I mean:

The S&P 500 is currently trading at 5,634 and would need to fall -3.95% to fall below 5,400.

But let's suppose that the index falls to 5,500 over the next few days... a patient investor waited and now decides to buy the index at 5,500. Their stop loss stays at 5,400 and they would only incur a loss of -1.8% if the market continues to fall & trigger their stop.

The closer an entry is placed to the stop loss, the better the risk/reward calculation becomes.

In conclusion, we should have a bullish bias going into the week, recognizing that dips above 5,400 should be bought and be tapered or trimmed if we actually fall below 5,400. If we fall below 5,400, then reclaim back above it, that's a sign of resilience and should be respected to the upside as well.

Identify the trend.

Determine a market bias.

Manage risk and optimize risk/reward.

That's the name of the game.

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