Monday, June 27, 2011

Holding a Middle Ground: US Edition

If you read my Sunday post with thoughts on the direction of the TSX60 in the coming weeks, you'll know I'm expecting flat to upside trading until the Canada/Independence Day holiday week is over. Holiday periods are usually marked by lighter volume trading which typically favours the upside.

My forecast for American markets, or more specifically the S&P 500 index, follows the same line of thinking. Even though I believe the dominant daily pattern on the chart is a bear wedge, volume is simply too light to expect it to trigger this week. Today's steady rise on low volume makes me confident this will continue to be the case.

In light of this, I'll be looking to buy dips--if any--into key support levels while waiting to ultimately short key resistance levels further up in the charts. The idea here is to ride the float up into the end of the week and short resistance levels which will be more likely to play out when volume returns after the holidays.

The levels I'm looking to short are 130 and 131. These levels correspond with previous pivots, the 50 and 61.8% retracements (respectively), the 50 moving average and the fill of a gap. My ideal shorting level is a break of 131 as this is the highest level, carrying the least risk, as well as the convergence of 4 resistance factors.

It should also be clear by now that the timing of any shorts is just as crucial as the entry price. If we reach these levels late Tuesday, for example, I will not be shorting them. Preferably these levels are hit on Monday or Tuesday next week.

Support levels I like are the 125.70 double bottom and the 124.12 pivot low from April 12. If these levels were to be hit in the next few days, I'd have no trouble going long due to the light volume I expect. However, I doubt we'll go that low this week.

As trading progresses and the charts play out, I'll be providing updates throughout the week. Hopefully by Wednesday or Thursday we have a clearer picture of what post holiday trading may bring to the markets.

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