3/5/2012 SPY #6

S&P 500 (SPY)

First of all, I want to let you know that I'm heavily biased to the downside regarding the current market. I simply don’t think the current US economy recovers enough to make another 52 weeks high, therefore I’m expecting the market to get a major reversal in the near future. I will try my best to analyze the stock move from a neutral stand point. If you don’t agree with what I say, I hope you can use this post as a reference and find something out of it.   

In the hourly chart, I see several bearish signals in the S&P. first, I see the S&P broke the uptrend channel and started to go side way, signaling the end of the uptrend yet this does not necessarily mean the up move is over; it can always consolidate for a while then continues on the upside again. Second, if you look at the peaks and valleys, each subsequent peak and valley is higher than the previous ones (P3>P2>P1, V4>V3>V2>V1) except peak #4. If the S&P is continuously trading higher, peak #4 should locate higher than peak #3 to complete the trend (usually called higher highs), instead Peak #4 unable to push higher and ended at the same level @ $138.2, where Peak #3 ended. This is only half of the picture though, the S&P needs to form a peak #5 that is lower than peak #4 (lower highs) and a valley #5 that is lower than valley #4 (lower lows) to confirm the trend reversal. Third, I also see a double tops pattern has been developing since last week. This “M” shaped pattern is a bearish signal especially at the top of the trend. If the S&P can’t make another higher peak #5, the signal of this bearish pattern is even more significant and a breakout to the downside will confirm when price drops below the confirmation level @ $136.16.    

The S&P is currently sitting at $136.94. Since bearish signals are seen here, I’m playing this from the short side. I think the best target for the double tops pattern is the 1^st support @ $135.52; unless you are willing to wait, you can push your target down to the shoulder tops support @ $134.69 (from the head & shoulders pattern few posts ago). The risk levels are quite straight forward as well. Most of the time when you trade a double tops, the top of the “M” pattern is the risk to your short selling position, that means $138.2 is your risk here. I also find a resistance level @ $137.29 from previous weeks’ price movements, this can be another option for the stop loss level too. The only question is where is the entry? If you wait the pattern confirms @$ 136.16 until you get it, you can only make $.64 cents at most and you will have at least a $1.13 dollars risk if you set your stop loss at the support/resistance level@ $137.29. This will give you a trade with a 2-to-1 risk & reward ratio, which is not good because you are risking $.02 cents for every $.01 that you trying to make. Rather, I’d prefer to sell short at the current price @ $136.94. In this way, you have a $1.42 potential gain from target and a minimum risk of $.35 cents, which has a 1-to-3 risk & reward ratio.

In the 15 minutes chart, I want to show you the diamond pattern. I would call this a diamond bottom pattern, which is bullish; however, if I put the bearish signals from previous chart into consideration, this should be a continuation diamond pattern to the downside. If you want to look at this as a diamond bottom, you will expect the S&P breaking the diamond frame on the upside. The diamond bottom pattern is like putting a mirror in the middle of it, the way it exits should reflect the way it enters. If you long the S&P right at the pattern breakout, you can set the target at the pattern begin point @ $137.75, otherwise, any overhead resistance such as the pivot levels @ $137.4 and $137.79, or the declining 200 periods moving average will be decent targets too.

In another case, if the S&P breaks the diamond to the downside, you should expect this to be a continuation diamond pattern. The measured move to the downside target should have the similar length to the move that leads into the pattern ($137.75 - $136.86), that is, you are looking for a $.89 cents move to the downside. However, a $.89 cents down move from current price @ $136.94 is just right pass the double tops confirmation; I suggest using the intra-day support @ $135.79 as target or sticking with the target from the hourly chart, which is the 1^st support level @ $135.52, in order to maximize gain on the down move.

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