3/19/2012 SPY #7

S&P 500 (SPY)

Hi all, first I would like to apologize for the recent delay on the blog updates. I'm currently in an online course for advance trading technique, hoping to put in some more elements in my trades and blogs.

The S&P moved up quite a bit lately, that’s means I can’t regard the up move as an overbought action anymore and I have to get my short bias of the table while reestablishing my mindset on the underlying trend. Remember “trade what you see, not what you think.”

Now let’s take a look at the broad trend from the weekly chart. The S&P pushed to a 2 years high today, last time when it was trading at the current level was in 2007 and 2008, therefore I go all the way back in the weekly chart to look for overhead resistances. I dropped a fibonacci retracement study from the 5 years high @ $157.52 to the 5 years low @ $67.1. Last week, I learned that once a stock retraces more than 61.8% in the fib retracement study, it should be treated as a reversal, or a continuation on the retracement direction. And here it is, the S&P clear the 61.8% fib retracement level @ $122.88 in late 2011 and pierced through the 78.6% fib retracement level @ $137.95, which was also the consolidation top and the 52 weeks high before it broke out. I'm expecting the current move to take the S&P up to the resistance level @ $143.32. If you take a look at late 2007 and mid-2008, the S&P found tops and bottoms at this level respectively, therefore I think moderate resistance will be found here. I also want to remind you guys tax season is coming up, people will try to take some profit out to pay tax, creating some selling pressure, do watch out for a slight pullback as we move forward to early April. Nevertheless, the pullback will be a buying opportunity and it should not go below the 1^st support level@ $134.64.  

In the daily chart, the S&P is still trading above the uptrend line (green color) I drew from my first post on this 2 months ago, therefore I think the pullback will not go any deeper than the green uptrend line. Also, I see the S&P flat based in between the gap top support @ $133.75 and the 1^st support @ $134.64. If you are willing to take a little more risk on the long side, you can set a hard stop at the gap top support @ $133.75, a break on this level should fill the gap bottom @ $132.83. Right now, the S&P looks like it is setting to make a 3^rd leg on the 1-2-3 continuation up move. The 5^th to the last bar is a wide range green bar with decent volume, this is the 1^st move on the 1-2-3 continuation. Followed by that are 3 consolidation bars that move in a narrow range, which is the 2^nd move on the 1-2-3 continuation. Today the S&P broke out of the consolidation range, triggering the 3^rd move. You can go long the current price @ $141.28 with a bottom of the consolidation as risk, which locates at $139.48, while setting your target at the resistance level @ $143.32. However, like I always say, you want to get in a trade with attractive risk & reward ratio. This long trade has a 1-to-1.13 ratio ($1.8 risk vs. $2.03 reward), which is an “okay” trade only; but you can always manage to get the stock at lower price if it retreats before it goes.   

In the hourly chart, price moved back to the up sloping channel previously drawn. And I also find 2 levels of support @ $139.48 and $140.74 sitting underneath it, these levels should be decent for 1 to 2 days. While price most likely trade up in the channel, I would use the minor support level@ $139.48 as a hard stop if I'm long, because I don’t see any underlying support levels until the gap top @ $139.48, which is $1.5 below and the extra risk doesn’t worth to take.    

On the other hand, I see it formed an inverted head & shoulder pattern when it broke down from the channel. The pink trend line in between the gap is the neckline to the inverted H & S pattern, when the S&P break above the pink line, it’s the confirmation of the breakout. The target on this pattern can be found by the standard measure rule,  

Height of pattern (B - A) + breakout price (C)  

= $138.06 - $134.36 + $137.89

= $141.59

The target on the pattern trade is $141.59, which is only $.30 from the current price. I know the run on this is exhausted, but if you follow my blog on a regular basis, you should realize the fact that inverted head & shoulder pattern always hits its’ target calculated with the standard measure rule formula, so keep an eye on this pattern because it works.

I do see some good setups but I'm don’t find a trade with good risk & reward ratio, so I don’t have any trade to write down this time until I see some “good” trades emerge from the water. I am also writing the updates on XLF and OIL, I will try to get these done asap, come check back in a few days.

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