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.

A day of rest for the markets

After a big move up or down, the market usually needs a day of rest before continuing on its way. Today was no exception as the S&P 500 traded mostly sideways and closed fractionally lower on the day.

Today's SPX candle is known as a doji--something created when the price trades within a narrow range throughout the day. A doji means indecision, and that's fitting considering the mix of good and bad economic and earnings news traders have been digesting over the past several days. I expect we'll see a continued move up tomorrow, but any surprise news regarding European or US debt issues overnight could complicate things.

As I explained yesterday, don't be distracted by earnings when trying to make sense of the bounce we're seeing. The current up-move is simply a factor of technical support and contrarian psychology. Continue to hold any longs you may have picked up and be sure to have breakeven stops for each of them.

I'll be watching closely as the charts unfold and will have good resistance levels as they approach.

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.

Monday Market Summary

Today the markets saw some sharp selling as European and US debt fears continue to irk traders. The SPY opened at 131.08 and fell as low as 129.63 before recovering to close at 130.61.

Big drop and nice recovery on SPY 10 min

Despite this selling, I continue to hold a slight upside bias for the short term. I think the markets are currently oversold and that the debt fear premium has been priced in for the most part already. The SPX broke the daily 20 moving average but still should have some short term support at the 61.8 Fibonacci retrace.

Good bounce off 61.8 fib on SPX daily

I still continue to hold a small position short the SPY via the HSD.to 2x ETF, as well as another small short in FTS.to. On the long side, I have a position in GIL.to based on the hit of the double bottom at 31.79 and another position in PG based on bullish consolidation above the 20 moving average.

Going forward into the week, I'll be watching the news and futures closely pre-market and after-hours. Debt negotiations in the US have overshadowed issues in Europe for the time being and traders are watching it with full attention. The market has priced in a lengthy, last minute agreement between Republican and Democrats which means an early resolution will cause a rally and no resolution will cause a fall. No debt resolution is a very unlikely scenario, in my opinion.

Tonight I'll be scanning for long setups in the event that we bounce as I expect we will. If we break lower, I'll simply look to buy stocks at the next set of levels down on the charts.

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)!

Monday Market Summary

Today the markets opened sharply lower again after debt fears in Europe resurfaced during overnight trading. The latest worry is that Italy will be the next country to be downgraded and/or default.  

The SPY opened this morning down $1.65 at 132.75 and went as low as 131.91 before getting a bounce back up to 132.50. From there the SPY traded back down and briefly touched 131.84, breaking the intraday double bottom and getting another small bounce. The SPY then traded lower again, hitting 131.66. From there the market traded mostly sideways for the rest of the day as is typical after a big move in any direction.

SPY 10min traded down for the majority of the day

These European debt issues are and will continue to be a serious issue for the markets, but the fact remains that the major stock indices are severely overbought and overdue for a correction. As long as this remains the case, any news the markets interpret negatively will cause them to sell.

Technically speaking, a second down day in a row after such a big rally during the past two weeks is significant as it tells me we're definitely in a short term correction. The question now is how much more downside can we expect in the short term.

The 132 area is the first level of major support. This was the breakout area before the massive follow-through rally that began the week before last on Friday. Just below here at 131.50 is the 50MA on the daily chart. As long as the market can hold this area, it's possible that we bounce and recover, but if it breaks we may have a more serious correction at hand.

SPY daily will have support at dotted blue lines, resistance at double top

I'll be watching these levels closely this week. Hopefully after a few more days of trading we'll have a better idea of which levels are going to be good for an extended move, either long or short. Until then, especially during options expiration week, I expect to see whips up and down. Weeks like this make swing trading difficult and is better suited for shorter term day trading.

Keep checking back here for daily updates and follow me on twitter for my thoughts throughout the day.

Are Ag Stocks Ready to Pop?

After a good move on Friday, the market seems prepped for a possible further push up on agriculture stocks like POT.to. The bullish case being made is that people need to eat under any economic circumstances and therefore stocks like this are safe bets.

As a technical trader, I'm not concerned with bullish fundamentals unless there are technical factors suggesting the same.  Fortunately, I see several on POT.to, Saskatchewan’s giant potash company, that suggest possible upside in the near future.

First, Friday's breakout up-move easily pushed through two pivot resistance levels--55.97 and 56.58. This alone is a bullish sign to be sure, but please note that the push up also brought the price above a crucial inverse head and shoulders neckline. What this tells me is that any retrace back down to the neckline (currently just below 55.50) is a good buy. However, a close back below the neckline negates the trade.

If POT.to keeps going up, there is no major resistance until 59.67 and 60.50.  And if it is able to show this much strength, re-testing February’s highs might not be an unrealistic expectation.  But, like always in tech analysis, this pattern has its caveats.

For starters, the left shoulder is not ideal as it is considerably smaller than the right shoulder. I like this pattern best when each shoulder is roughly the same size. This coupled with an overall market that is very extended makes me cautious about jumping on board just yet.

Also of relevance, check out AGU.to, another agriculture stock with a similar inverse head and shoulders pattern. The same rules apply to this trade--a re-test of the neckline is a buy and a close below it is a stop out. AGU.to will have resistance at the 88 and 93 pivot highs.

On either of these trades, please mind your stops. Both stocks will not have significant support until their moving averages several dollars below the necklines.

I may take either POT.to or AGU.to for a long swing on a re-test of the necklines, as outlined in the charts above. If you're already in these trades for any reason, just be sure to use a stop to protect your profits. Also, just to reiterate, please be aware that the market is incredibly extended. Any and all stocks are due for a pullback at any time, including these. This doesn't mean that a bullish pattern can't play out, it just means be careful.

American readers should note that POT.to and AGU.to trade interchangeably with their NYSE counterparts POT and AGU.

Head and Shoulders on the SPX? Not yet.

The S&P 500 has the potential to create a bearish head and shoulders pattern sometime in the near future. This pattern remains valid as long the SPX does not close above the double top at 1370. Once the right shoulder forms, I will take this trade on a close below the black neckline which right now is just above 1260.

Please note that as of right now this is just a potential pattern; it's not a head and shoulders yet. I've heard a lot of chatter online suggesting that this pattern is already in play--it isn't. This short is in play only on a close below the black neckline and not before. It will also cease to be even a potential pattern if it should close above the double top. In this event the chart may still remain bearish, just not a head and shoulders pattern.

This pattern will not be actionable for a while--likely a week or more--but I will be watching it closely and provide any updates here and on twitter as I see them.

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.

Mixed Signals

Today the S&P 500 ended flat. This isn't surprising as the market is incredibly extended right now since bouncing in mid June. Even with light volume the market needed a day of rest before going up or down any further.

Yesterday I wondered if the market would go up or pullback today. The signals the market gave us are mixed and require some analysis. Going forward into the rest of the week I think there is an almost equal case to be made for either further upside or a small pullback.

The SPY ended flat and even had a float into the close. Today's daily candlestick ended in the form of a doji. Under the right circumstances, a doji hints at a possible reversal in trend. Idealy, I like to see doji candles form right underneath resistance levels after a extended move--this setup is usually a good short entry for a pullback. We got the extended move and the doji today, but still didn't quite hit the next resistance level at 134.30.

Based on this last candle, there are a few of scenarios that could play out tomorrow. First, the extended move plus a doji could lead to a reversal. In my opinion, this is the healthiest move as we're very extended and it's difficult to go long or short stocks at these intermediate prices.

Alternatively, if we push up into the next resistance pivot at 134.30 we could pull back from there. I will be watching this closely if it's the case as we came very close to hitting this level today and that slightly lowers the odds of it being resistance when it actually hits.

The third option sees us forming a second doji candle on the daily chart. This option is the trickiest because it's still possible to have a pullback, but two sideways days after an up day is very close to creating a bull flag consolidation pattern and hints that there may be further upside still. In this case, we'd probably push all the way back up to the double top. If this ends up being the case, I may decide to cover my shorts just before the close tomorrow just in case.

With these three scenarios in mind, I will be preparing my trades for tomorrow. As the holiday weekend fades, volume should start to re-enter the market and volatility will increase. I'm confident that soon we'll get a move in the market one way or the other and tomorrow might be that day. I'll be watching the futures overnight as that should give us a clue to what might happen.

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.

Friday June 1 Market Summary

Yesterday I posted about a possible up move in the markets despite technical resistance because of the low holiday trading volume. Today we got exactly that, but to an extent that even I didn't anticipate. The SPX rallied +19.03 to 1339.67, or almost $2 on the SPY. This is a very big move, so I'm glad I decided to wait until after the holidays to add a second round of shorts.

The trading session actually opened uneventfully and stayed in a narrow range, as you'd expect on a Friday before a long weekend. Then at 9:30ET, ISM numbers came out at above market expectations and the SPY spiked almost $1 within a single 10 minute candle. For the rest of the day, the markets floated on extremely light volume without ever pulling back.

It's hard to put much meaning onto this rally considering the volume, but the price action is all that matters at the end of the day. I'll continue to have a stop in place on all my shorts and will look to add further shorts higher up in the charts if the market continues to float. The market remains very extended and the probability of a pullback soon is still high.

If we do continue to rally next week, as we well may, I'll look to add more shorts on the market and on stocks at the the SPX 1346 and 1370 levels. I think it's unlikely we go as high as the 1370 double top, but it is possible.

Last night and this morning I posted several short setups that should play out when the market pulls back. And assuming we don't pull back before then, I'll probably enter some of these shorts mid next week.

• MCHP Short 
• LLTC Short 
• INTU Short
• FTS.to Short
• NXY.to Short
• CCO.to & FM.to

I'm currently short FTS.to and partially short the SPY and NASDAQ. I will be sure to advise of any future shorts on this blog and via twitter.

Key level: MCHP Short

MCHP is into strong resistance at the current levels. When the market pulls back, this stock should as well. I will consider shorting this stock if it pushes back to today's highs, otherwise I'll keep it on watch for next week.

There are five resistance factors here: the 50MA, gap fill, bear flag, 50% fib and a previous pivot.Good short between 38.34 and 38.67. I'll look to enter at 38.67.

Key level: LLTC Short

Linear Tech Corp (LLTC) hit strong resistance today at $33.27 and pulled back. In the event of more upside tomorrow there will be a good opportunity for a short entry.

There are 3 resistance factors here: the 50 moving average, a gap fill and a previous pivot low. The short is valid anywhere between $33.44 and $33.61. I'll probably look to enter at around $33.50, just above the gap fill.

Key level: INTU Short

In the event of a market pullback, Intuit Inc. (INTU) will have strong resistance between 52.50 and the 50 moving average.

There are 6 factors here which could contribute to a pullback: the 50 moving average, two pivot lows, the 50% fib retrace, a gap fill and a bear wedge candle formation. This is a very similar situation to the markets overall so we'll be looking to it to help guide this trade.

I'll enter this short on a hit of the 50MA but it's valid anywhere above the gap fill at 52.48. Make sure to keep a stop as the market can rise easily during holidays.

Thursday Market Summary

Thursday was another sharp up day in the markets. This should not be a surprise to anyone who reads this blog or follows me on twitter. The S&P 500 index broke through the 61.8% fib level, the 50 moving average, a pivot low and a down sloping trend-line. I think it's possible we go higher to the 1330 or 1345 levels, but we are currently into strong resistance that should bring some sort of pullback.

I took a short position on the SPY at 131.70 and 132.05 via the HSD.to 2x ETF, as per my post yesterday. I also shorted the NASDAQ at around 2773. Both of these positions ended flat on the day.

The timing of these shorts could be better as we're entering into a holiday period. Those who've been following me know that I generally assume an up market in light volume holiday trading. In fact unless we get some kind of horrible news out of Europe, I wouldn't be surprised to see a flat or slightly up day tomorrow. The shorting levels should still work once the holidays are over.

Canadian markets are closed tomorrow for Canada Day. The TSX60 is into strong resistance as well, but I'd like to see it higher before shorting, preferably into the daily 200MA or even the 50MA. I'm less confident that a top is in on the TSX so I left it to short on Monday or Tuesday in case the markets float up again.

I'll be watching the markets on Friday but I expect trading to be extremely light in volume and therefore fairly boring. If I see anything interesting I'll be sure to post it here or on twitter.

Key level: FTS.to Short

Just a few days ago, I alerted via twitter that FTS.to would have strong support at 30.80. Since then the stock has risen $1.38--not bad.

Just as quickly, FTS.to is now high on my list of stocks to short. Assuming the market has 1-2 days left of upside left before pulling back, I like the 32.40 level for resistance. There are 5 factors at this level: the 50MA & 200MA, the 50% Fib and a previous pivot low all within a bear wedge.

This is a high probability short, but if for some reason the market surges I'll be more cautious about taking a position. There is also some resistance at 32.70 and 33.85. 

Update: Today FTS.to went to 32.48 early in the morning and pulled back. I shorted the retest @ 32.48 before it spiked even higher to 32.65. FTS.to then came all the way back below the resistance at 32.40, so the level is still working. We'll see what next week brings for this stock.

Key levels: NXY.to Short

NXY.to is another stock that may have already hit resistance. But in the event of more upside, I like the 21.71 level for a short swing. Just below this level is a range that includes another pivot and a 61.8% retrace--all should act as resistance when the market pulls back.

Key levels: CCO.to, FM.to

In the event of a market pullback late this week or early next, I like the following stocks on the short side.

Cameco Corp (CCO.to) will hit resistance at 25.20 and 26.38. The 25.20 level is very close and I don't believe the market has hit a top yet, so I won't be shorting there. 26.38 is a much better level as it has three resistance factors and fits with my anticipated pullback time frame.

First Quantum Minerals (FM.to) may already have hit resistance close to its current levels, but I think the 139.25 and 148 double tops will see good pullbacks as well. Which of the two I actually short will depend on how close the market is to its own resistance levels. This stock has been consolidating for some time so be sure to keep a tight stop in case of a breakout.

 

I'll be updating this post if I take any one of these trades, so check back or follow me on twitter. I'll be following the markets closely in the next few days and soon we should have a good idea of how the charts will unfold.

Holiday Float Continues

This week's trading has been unfolding much as I outlined in several posts over the weekend. The slow, light volume holiday float up has continued. And while it's been a bit boring to watch, the gains to the long side have actually been fairly substantial.

If you follow me on twitter (@thetsxpert), you'll know that I was looking to pick up several long positions into this week. This included stocks like FTS.to, HSE.to, CNQ.to, IMO.to, ECA.to and SU.to, as well as commodities like oil and natural gas via the HOU.to and HNU.to 2x ETFs. I thought that since the markets were oversold and approaching a holiday period, picking up stocks long into key support levels would be a safe bet. My analysis also showed me that oil & gas were making bottoms, so I concentrated my picks in those areas.

Unfortunately, these stocks came within cents of my entry targets before taking off sharply to the upside--in most cases dollar plus gains so far. The only position I ended up getting filled on was HNU.to and ECA.to, both natural gas related. I'm very happy with their performance but of course I'd be much happier with more long exposure given the gains in the market.

But what the market giveth, it also taketh away. I'd probably be looking to take the gains off the table by now, or close to it. In fact, I was debating towards the end of today whether or not to take profits. I ended up holding as I think we may have a day or two more of upside, but I have breakeven stops in any case.

Both the TSX60 and the SPY are close to some major resistance levels, which you can read about here and here. My position is the same--if resistance levels are hit later this week or early next, I'll short them.

I also think there's a decent chance of going sideways tomorrow. The market appears to have priced in Greece's parliament voting in key austerity measures tomorrow morning. Therefore if the vote passes as expected, the market should hold on to its gains and do little else. Alternatively, a surprise impasse in the vote could weigh on the markets to the downside.

In any case, I'll be looking for trades on both the long and short side so that no matter what happens tomorrow I'll be ready to take advantage of it. I'll advise on my findings later tonight both here and on twitter.