2/27/2012 SPY #5

S&P 500 (SPY)

The S&P 500 just hit a new 3 years high @ $137.53 this afternoon and the Dow is back above 13000 again. Honestly, I think this is a fake out rather than a break out. Europe hasn’t gotten themselves out of the turmoil yet and the G20 just refused to raise the international lending for Europe this morning. With the uncertainties going on, I personally don’t see any reason for all these optimisms in the market.

In the daily chart, I prefer to bet on the short side considers there isn’t any real good news happening in the market. I think taking a small position to sell short here is viable because of the DOJI (second to the last bar, white bar) and the resistance level @ $137.47. A DOJI refers to a price bar that opens and closes at the same price; and when it appears at the top of the trend, it is usually a signal of reversal. Unless a price bar opens above the DOJI’s high @ $137.2 or a wide range bar that lifts the market up to another level, otherwise the DOJI will still be in play. Besides, I also see a resistance @ $137.47 coming from a head & shoulders pattern’s neckline back in May, 2008. I expect the S&P to flip around the 1^st resistance @ $137.47 then goes into a direction, which is hard to anticipate with current setup. However, if you sell short at current price @ $137.16, the 1^st resistance @ $137.47 will be your risk, which is $.30 cents away. I think the strength of the 1^st resistance is minimal, it’s more like a reference level rather than a reversal point. Comparatively, the 2^nd and 3^rd resistances @ $140.43 and $142.55, which were the shoulders’ top and the head respectively, are better resistance levels since the S&P spent longer time in 2008 consolidating between these 2 levels. If you don’t want to be too aggressive, entering a short position at the 2^nd resistance @ $140.43 is a safer trade. Your risk will be the 3^rd resistance @ $142.55, which is only 2 points away. While your risk is limited, you want to put your target out at the shoulders’ support @134.69, which is 5.5 points away from the 2^nd resistance @ $140.43. With a risk & reward ratio of 1-to-2.5, don’t you think this is a good deal?  

In the hourly chart, you can see the S&P continues to trade up in the channel from last post. To trade this on an intra-day basis, it is better to wait until the S&P hits the top boundary of the trend or the pivot resistances @ $137.83 or $138.54 before you get in the market shorting it. If you look at the 15 minutes chart, the S&P seems like a half done dome shaped rounding top. Because rounding top is a bearish pattern, this is also part of the reasons why I said shorting the market at current price is a possible trade in the previous paragraph. You should expect the dome shape to be completed around the Intra-day support @ $135.79 within this week. Furthermore, the price actions also give me some hints, the market pushed the S&P to the high @ $137.53 for less than 15 minute today and then the sellers immediately came in squeezing out the buyers, pushing the price down to where it was trading before it broke to the high. If the S&P wants to continue in the uptrend, it needs to make a distant higher high above the previous peak @ $137.19 to shake out the majority sellers in the market. However, I think the slow up move will eventually exhaust the optimism the fuels the move; the S&P shouldn’t break the top boundary of the uptrend channel or go any higher than the 3^rd resistance @ $142.55 from the daily chart.

Of course, if you don’t want to short the breakout, you can get long but your risk & reward ratio will not be as great as the short position. In the 15 minutes chart, you can get long at the flat base 2^nd support @137.04 but then your risk level will be either at the 1^st pivot support @ $136.1 or the intra-day support @ $135.79. Either way, the long trade has at least $1 of risk while not knowing how far the up move can reach. An optimistic target for the long trade will be the 2^nd pivot resistance @ $138.54 which is about 1.5 point away from the entry @ $137.04. The risk & reward ration here is 1-to-1.5, a ratio that is less than 1-to-2 is deemed as a bad trade. Nevertheless, if you get in the long side, the intra-day support @ $135.79 or 1^st support @ $135.52 are viable options to set your stop loss depending on how much risk you want to take. And make sure you don’t let the S&P breaks below the bottom boundary of the uptrend channel; once the channel is broken, it is a clear signal for the sellers to come in and smash the price down.     

        

I hope this post offers you some insight, thank you for reading and please feel free to give me some feedback.