S&P 500 (SPY)
Last week, couple major news came out: first, Fed chairman Ben Bernanke announced that he is going to keep the interest rate low between 0%-.25% until late 2014; second, unemployment rate dropped to 8.3%, the lowest since February 2009 and beating the estimates on the Street; and third, the ISM index hit an 8 month high, indication shown both the manufacturing and service sectors are growing at a faster pace. Overall, I think the economy is gaining momentum to the upside, the rally should continue for a certain period of time, at least until the upcoming US presidential election in early November. Meanwhile, inflation rate, while falling, is sitting 1% above the target of 2% and Bernanke also claimed that he wouldn’t scarify inflation rate target to boost employment, therefore I think QE3 is not coming anytime soon. As of right now, the economy is moving back on track at an increasing pace, I don’t see any reason for the Fed to inject more liquidity into the economy at the moment, which would fuel the inflationary risk.
Alright, let’s starts off by reviewing last week’s hourly chart. In the hourly chart, the support level @ $130 turned out to be a good support; the S&P bounced right back into the up sloping channel continuing the rally. Recently, the S&P hit a new 6 month high @ $134.62, which is 7 basis points away from my target @ $134.62. I'm expecting this to retreat to the bottom of the channel then bounces again, but there is also chance that it may find a solid ground at the gap (top) support level@ $133.75 depends on the market sentiment. But do keep in mind that the down side risk is at the channel bottom or the gap bottom @ $ 132.83. If it breaks both the channel bottom and gap bottom, gives the market time to consolidate and find a direction before jumping in again. In long term, I think the S&P will definitely test the shoulder top level @134.69 again and it may push as far as the 52 weeks high @ $ 137.18. You can also use the channel top to locate your target, just make sure the risk & reward ratio is worth to trade.
In the 15 minutes chart, the S&P gapped up 2 times last week and trading within another up sloping channel. Although price is channeling up, I don’t think this channel is legit mainly because the price movement is a bit too skippy and too much white space exists from side to side. Further, the channel is too steep to maintain, I doubt such kind of sharp price movement can’t sustain for long, especially in a short time frame chart. I will use this channel only if I want to keep my trade brief and the risk tight. Comparatively, the gaps are better tools for this trade. The first gap is @ $131.44 –$132.13 (Gap #1) and the second one is @ $132.83 – $133.75 (Gap #2). The tops and bottoms of both gaps should serve decent support levels. Right now the Gap #2 top @ $133.75 is the first support level the S&P going to encounter, remember that once it cuts below gap # 2 top, price will always try to fill the gap by reaching the gap #2 bottom @ $132.83. Like last week, S&P gapped down from $131.82 to $131.08 in the morning, it slowly moved back up during the day and finally filled the gap when the market opened on the following day. In the current situation, if the market is going to head down, don’t try to hold on to the losing position from one gap to another, cut loss decisively; you can always buy it back at the gap bottom if it is trying to fill the gap on the downside.
Here is an example of how I would play the gap. If price retreats back to the gap #2 top @ $133.75, don’t jump into a short position right away, wait for a confirmation to happen. Confirmation occurs when: (1) a price bar (triggering bar) breaks below the gap #2 top level; and (2) the following price bar (confirming bar) opens underneath it. That’s the signal to a short selling position. If you wish to be a little more conservative on this trade, add another 2 conditions to the previous 2 before you take on a position: that is, (3) the confirming bar has to hit a lower low and (4) close lower than the previous triggering bar. Notice that, adding another 2 conditions will scarify the potential of larger gain, but since everyone has a different risk tolerance, pick whichever way you are comfortable with. Once I'm in a position, the gap #2 bottom @ $132.83 is my primary target and if the momentum is strong, I would cover half of my size @ the first target and let the rest runs down to the gap #1 bottom @ $131.44. In terms of risk, I would use the top of the triggering bar as risk. However, if you are willing to risk more to prevent pre-mature stop out, you can also set the risk at the top of the bar precede to the triggering bar.
I hope this post offers you some insight, thank you for reading and please feel free to give me some feedback.
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