What to expect from the S&P 500 this week

This week the S&P 500 is positioning for a possible move to the upside. Since the week before last, the market has bounced considerably from the 1120 level and is trading sideways under the daily 20 moving average. As long as this sideways consolidation continues, a small bullish flag pattern has the potential to play out.

SPX consolidating micro bull flag for potential move up

A move up will have very little resistance until the 1250 level, at which point it will likely pullback. I will look to short a hit or break of this level. There will also be minor resistance at the pivot high at 1210 and the 50% fib at 1224.

My upside bias is unchanged since I suggested that a short term bottom for stocks was in after the bounce of August 8.  I also think that any movement up will serve to consolidate a macro bear flag formed since the large drop in late July.

If the market fails to move up and closes below the low of 1100, the bear flag will trigger and I will change my outlook to bearish. This is a distinct possibility as the markets are still rattled by European and American debt issues. Now more than ever, it's important to trade all up moves very carefully.

Wild trading leads to possible bottom on the SPY

Wednesday's trading was all over the map. The market opened flat and inched up before flushing dramtically lower, going from nearly 126 to 123.50. From there, the SPY staged an incredible rally pushing up to close near new highs on the day. This is an impressive move for a market that has seen seven powerful down days in a row.

A big flush followed by a huge rally on SPY 10 Min

The market was and is long overdue for a bounce. Financial turmoil in the EU and the US has created an enormous amount of fear and that tells me a short term bottom may be in place.

Technically, the daily SPX chart has a bottoming tail indicating the potential for higher prices in the days ahead. Until we close below this tail, I'll keep an upside bias on the markets. If I'm correct, expect a move back to a 50% or 61.8% fib level before ultimately trading back down.

A bottoming tail signals the potential for higher prices on the SPX

Because this is the first up day after several down, I'm keeping my analysis simple until a bottom is confirmed with a followthrough move higher. When and if that happens, I'll have more concrete support and resistance levels.

Going into the rest of the week I will be trading very carefully until I have a better handle on the direction of the market. Tomorrow's close will be telling.

Another big up-day for the SPX

The S&P 500 traded sharply higher today up nearly 18 points, or 1.35%. This rally came presumably on the back of good earnings reports and optimism that US debt ceiling negotiations may be close to an end. Progress in Europe in securing a bailout packages also helped to buoy prices.

Readers of this blog will know that I don't believe in fundamental explanations of market moves. As I've written numerous times, this 50 point rally we've seen so far since Monday is based simply on technicals and contrarian market psychology.

You'll recall from my previous posts that last week the market was oversold, overly-bearish and into technical support at a key 61.8% Fibonacci retracement level. Interestingly, traders last week and over the weekend were as bearish as they've been in years--this is what gave me the confidence to call not only for a pause but a significant bounce in prices this week.

Monday's hit of 61.8 fib level leads to big bounce on SPX

Psychology plays an important role in determining the short term cycles of the market as big financial institutions look to shake out smaller traders from their short positions and devalue their put options. Once these same traders have been discouraged enough and become bulls, you can be sure the market will reverse and correct downwards. Combine this this contrarian psychology with good support and resistance levels and you will see powerful moves in the market.

If you were monitoring intraday trading on the SPY or any other major market index, you saw these concepts in action on a micro level. At approximately 12:40pm ET, the SPY rallied sharply on a rumour that debt negotiations had concluded, only to fall back sharply 10 minutes later on another rumour that a deal had not been reached. Both of these reports turned out to be either inaccurate or unsubstantiated and the SPY continued to trade upward as normal.

SPY 10 Min whips up and down then continues sideways

Going forward, I'm no longer strongly bullish although I think the likelihood of further upside tomorrow is reasonably high. I mentioned earlier this week to look for resistance at the 1340 and 1356 levels on the SPX. Today, we breezed through 1340 but 1356 should continue to act as resistance should we reach it. I may consider picking up some short positions if we reach 1356, but I will keep them small and maintain a tight stop.

Check back here regularly and follow me on twitter for my latest thoughts on the market.

You Win Some, You Don't Lose Some

I’ve only been writing here a few weeks, but this isn’t the first--and won’t be the last--time I mention the importance of setting stops and sticking to them.  This surely isn’t a novel concept and is highlighted in any good 'Trading 101' book or program. If you always abide by your stops, I applaud you, and you're probably well on your way to being profitable. But I know some beginners read this blog, so I'm going to add my voice (and today's example) to the many telling you why stopping out is such a critical component of successful trading. 

As I have reported, before today I had been holding FTS.to short and HSD.to, a 2x short ETF of the SPY, long.  They were working well for me, and I had set what I hoped were reasonable targets.  However, I never enter a trade without knowing not only where I want to exit (my target), but also where I need to exit if things go bad (my stop).  Pre-market today, it was clear that these were going to hit my stop out levels.  So I set my order, and when they were triggered almost immediately at the open, I wasn't overjoyed.  But I also hadn't lost money, so I wasn't unhappy, stressed, or in the hole. 

Given the rally today, I am quite happy to be out of these shorts. Would I have liked to make money on those positions? Obviously--you hope to profit on every trade. But that's not possible. The next best thing is to never lose money. 

It's especially tempting to hold on to positions now that I am blogging - trades that go against me are now public.  But that is all the more reason to show that I stick to my rules.  So if you are a beginner, this one post may not make you to abide by your stops, but I hope it helps you on your journey.  I'm not perfect, and I'm well aware of wanting to hold on to that position just one more day to give it a chance to turn around.  I know when I first started trading I always had good intentions but didn't necessarily know how to follow through on them, and of course I'm human so I still make mistakes.  So I will try periodically try to come back to this topic, because it's something that even experienced traders like myself can't hear too often.

Thursday Market Summary

Today's trading was very much reminiscent of yesterday's. The SPY opened just about flat then rallied and ultimately fell to make new lows on the day.

The take-away from this is that the market remains in an extremely weak position and will continue be this way until the US and EU debt crises get some kind of (temporary) resolution. Until that time, or until we're in a stronger technical position, it appears that every rally will be sold into.

From a daily chart perspective, today we came very close to my 20MA average target, which today is at approximately 131.63. I may regret not covering my short position there as sometimes a near hit is as good as an actual one, but I think this market remains weak so I'm not worried going forward into the next few days. Also, please note the bear flag that is potentially playing out based on the last 5 days of trading followed by today's down-move.

SPY daily bear flag breaking down?

Intraday, the SPY opened at 132.17--a huge recovery from the dump on the futures last night, which at one point was down over 10 points. From there, the SPY traded as high as 132.78 before falling all the way down to 130.68. After hitting these lows, the SPY got a big bounce back up as high as 131.70 and then all the way back down to 130.75 before chopping sideways for the rest of the day. The SPY closed the day at 130.93, down 0.69%.

Massive range on SPY 10 min chart

Something else of interest I'd like to point out here is the massive intraday ranges we're starting to see, while never closing that far away from the open. This ends up making what's known as doji candles on the daily chart and can make swing trading a position over several days somewhat frustrating. On the other hand, it makes for a fantastic day trading environment.

Tomorrow will be very telling as we'll have a better idea if this breakdown will persist or if the market will rally off of daily support levels into Friday and next week. Be sure to check back here and follow me on Twitter for my latest analysis. I expect to have some actionable levels and trade setups very soon.

Wednesday Market Summary

If you read my market summary from yesterday, I outlined a few scenarios we could expect going into today. Of those scenarios, I thought a big rally was the least likely and this is exactly what we got--initially. As I watched my screen this morning, I was a bit surprised to put it mildly.

The culprit for the rally was Ben Bernanke who today announced that IF certain economic trends persist (namely, slow growth) then further economic stimulus MIGHT be necessary. He also indicated that the Federal Reserve would be willing to step in and provide said stimulus, though he gave no firm commitment.

Be sure to read the write-up on this I posted to the blog earlier today.

In any case, I'll continue to trade the technicals and right now we're still in a middle range on the major indices. I'm still holding a couple of small short positions from last week which I'll continue to hold until we reach my target (20MA on SPY daily) or I get stopped out. But until we have a clear direction on this market, I'm very hesitant to initiate any new long or short plays. So far, the SPY has bounced off of daily support levels after the down-move of late last week and early this week. Technically, this is just a bear flag so I'll continue to maintain a downside bias.

Two slight bounces after big down days on SPY

Intraday, the SPY was all over the map. It opened the day at 132.09, up considerably from yesterday's close of 131.40. From there, the announcement from Bernanke sent it all the way up to 133.22, after which it had a steep fall back down to 131.52 before getting a small bounce into the close. The SPY ended the day closing at 131.84. This was very much a repeat performance of yesterday, just with more volatility.

Fading the QE3 announcement

Stay tuned to this blog and to my twitter feed as I keep you updated on this market. I know it's been quiet here in terms of giving out trade setups, but I have a feeling things should start to heat up once we hit key levels. I'll continue to let the charts be my guide and fill you all in as it happens.

Market Surges on QE3 Suggestion

Today Fed Chairman Ben Bernanke indicated that fiscal stimulus programs would be available in the future as needed, ala QE3. The SPY spiked sharply on this news as the US dollar dropped.

The Bernanke Effect

This should come as no surprise and is clearly the cause of yesterday's short-lived spike on the SPY at around 2pm ET. From my perspective, there is no way Ben Bernanke would ever say something the markets could interpret negatively. Fiscal stimulus comes in the form of soothing words just as often as it's monetary, and it's an area where the Fed has unlimited ammunition.

Prolonging the Fed's quantitative easing program means a weakened US dollar, and that will inflate the markets--just what we're seeing on the SPY intraday. It's unclear if this rally will hold, but a continually devalued US dollar will continue to push the markets up.

Despite all this seemingly bullish news, it's important to remember that Europe is still in trouble and those issues will not go away overnight. Any developments on this front (downgrades, defaults, etc...) will hit the Euro hard and therefore the markets.

In the event of a falling Euro and a rising US dollar, Ben Bernanke and his team at the Fed will have almost insurmountable task ahead of them in supporting this market. But until then, it's up up and away (for equities and commodities)!

TSX60: Possible Pivot formed

The TSX 60 may have formed a pivot top, as suggested by today's move down in prices. Confirmation  of this top assumes that the index does not recover before the end of the day. A move back up would be considered a consolidation pattern and not a pivot top.

If this pivot is confirmed today, the next support level will be at the 50% retrace/20MA/previous pivot level at approximately 832. If we consolidate above these levels for any amount of time, I'll assume a move to the double bottom or lower is in order.
 

I'll be keeping an eye on this pattern throughout the day and post an update later tonight.

Finding the Key to the Market

In any given market there is an over-arching concept or chart that can sway it one way or the other. For example, in a market driven by FX, the breakdown or breakout of a particular currency will have a direct, lockstep effect on stock and commodity prices.

Earlier this week I spoke about what I called the "FX-factor", or the affect of the Euro/US dollar coupling on the US stock market. The charts I posted showed clearly that the dollar would bounce and the Euro would fall, and that's exactly what happened. However, the market didn't react as it normally would. The USD and the SPY essentially rallied together.

There are an infinite number of reasons why this may have been the case. In my opinion, the combination of low volume and a market consumed with fundamentals like European debt and US jobs data let the major stock indices float as if in a vacuum.

The question now is what sort of catalyst will cause the markets to finally correct to a sustainable price in the short term. The S&P 500 is very close to a double top on the daily chart, but that's still another 30 points away. It's possible that we get there, but it's increasingly unlikely without first pulling back to consolidate.

SPX still far away from 1370 double top

While I was watching this chart today, I was reminded of early June when we were wondering where the market would bottom. If you followed me on Twitter then, you'll remember that we were looking for either a hit of the 200 daily MA or the pivot low just below it. Due to the precipitous fall we were experiencing at the time, I chose to wait for the pivot low as it had a higher risk/reward ratio of playing out in my favour.

SPX bounces sharply before hitting key pivot

Of course you'll also remember the SPX just barely hit the 200MA and never hit the bottom pivot before sharply reversing to the upside. The Nasdaq was a different story; it broke its 200MA and went all the way to the pivot below it. After hitting this level, the SPX, Dow, etc. all bounced sharply to the upside and the rest is history.

Nasdaq gets huge bounce from key pivot

With this in mind consider that we're in a similar situation right now. The SPX has just broken a major pivot level and seems to be on its way further up to the double top at 1370. The Nasdaq on the other hand is very close to its double top from early May and it will only take a slight push up for it to reach this level. Following the logic that the Nasdaq led the markets up, it stands to reason that it could lead the retrace back down. This could suggest that the SPX retraces before hitting 1370.

Nasdaq double top is extremely close

Right now, this is all just a theory based on an observation. We'll have to wait and see how the market reacts to this level either tomorrow or the next day before concluding that it's the key to the market. I may take an additional short should the Nasdaq hit the double top target, but if we close above it I'll most likely cover the entire position and wait on the sidelines for the next trading signal.

Check back here for updates on this topic and follow me on twitter for my latest thoughts on the market.

The FX-factor: Update

This morning I posted about the interesting fact that the stock market has rallied sharply while the Euro--usually coupled with it--barely moved up at all.

Just after posting this thought, the Euro pulled back relatively sharply off the resistance levels I noted. The US dollar bounced as well. At the same time, the market pulled back sharply, as you'd expect, before floating back up for the rest of the day.

FXE (candles) with SPY overlayed (line)

 As you can see, the decoupling continues. The FXE is pulling back while the SPY pushes up. It's only a matter of time before one or the other gives and either the market falls with the Euro or the Euro breaks up and joins the market.

Tonight I'll be watching the Euro and US dollar futures. If the Euro fall/USD bounce continues, the market will have a difficult time pushing up under any kind of heavy volume.

FM.to Short Setup

FM.to is coming into good resistance. If the market has another leg up, this short will likely trigger sometime tomorrow.

The short is based on the hit of a double-top at 147.50 after a very extended up-move. The stop should be placed above 147.50 level, using whichever method you prefer.

FTS.to

Weak showing for TSX60

The TSX60 Capped Index ended up 0.62% Monday while US markets were closed for the July 4th long weekend. On Friday US markets rallied sharply while Canadian markets remained closed.

As you you'll recall from last night's article, I expected the markets to gap up by approximately the same percentage basis as the US markets rallied Friday. This was not the case as the TSX closed up only by about 1/3 the latest SPY close. In fact, earlier in the morning the TSX was actually trading negative.

Float up, fade down.

This kind of showing is interesting. The fact that the TSX under performed the S&P 500 by a good margin shows that perhaps some of the exuberance of Friday's rally has faded. It also confirms my suspicion that the TSX might lag as it had not yet hit major resistance just above Thursday's close.

If the TSX does continue to push higher it will hit strong resistance at the 860 pivot low and ascending trend-line. If Tuesday's market pulls back, the 50MA at 850.95 will remain a barrier.

With Canada's exchanges re-opened, what remains to be seen is how the US market trades post holiday weekend. The SPY is arguably in a more precarious position as there is no real support until all the way back at 132, the breakout level from Friday afternoon's initial spike. On the other hand if US markets continue up, there's no real resistance until just above 134 and then all the way back to the double top at around 137.

The futures will be re-opening for the week shortly and I'm eager to see how they perform. I'm still short the market and will be looking to get more short in the event of further upside. Personally, I think it's likely that Tuesday is an uneventful day with little price movement either up or down.

If any news is released overnight, I'll re-evaluate my position. Follow me on Twitter to stay up to date with my latest thoughts.

The Week Ahead for the TSX

The week going forward will be an interesting one. I'm eager to see how the Canadian markets react to the sharp rally seen in the US on Friday after being closed for Canada Day.

Most likely, the TSX will gap up to match Friday's gains in the US. The question is where will it hit resistance.

You may recall that the SPX closed Thursday slightly above several resistance levels. The TSX60, as of Thursday, has not yet hit it's upper band of resistance on the daily chart. This includes the 200MA at 845.89, the 50MA at 851.53, the 61.8% fib at 854.26 and the blue trend-line at ~860.

Getting to these levels will take a good push up to be sure, but the fact that there is clear resistance ahead possibly shows a more definitive top than on the US S&P. And while it's possible we eventually break above these levels, it 's very unlikely that it happens before trading resumes in the US on Tuesday.

In any case, Monday's trading should be relatively uneventful. Once the initial gap up has occurred, I expect that the market will trade sideways or slightly up for the rest of the day. I'll be sure to post my initial reactions to the open on Twitter and post a summary here at the end of the day.