Good morning traders. I’m providing an update on the S&P 500 because there are several things going on that are worth pointing out.
We’ve previously made the call that coming into the low (marked with white balloon above) the Monday before Christmas was a short covering opportunity for several reasons. The market was very low in the cycle indicated by the daily stochastic, you could notice an 8.6 six count of daily candles, the RSI was at oversold levels, and implied volatility was at new highs. Further, we also noted the significant angle and distance of price away from the 8-period moving average. These are all elements that we talk about in our trading model. We took advantage of the short covering opportunity to cover well, and now is the time to start putting out shorts again.
We have been expressing that via Puts to start. In the graphic below, I’ve highlighted how today is an eight-count on the daily chart, so between today and tomorrow the market has now cycled back to the top of the range.
I’ve also highlighted prior support around 2600 that is a key area to watch, which is now resistance. The market broke the low of 2583 on Dec. 10th. It also made a lower-high within this downtrend around the 19th and so it creates a whole zone around 2580 to 2600 that is important. Additionally, you also have the 200-period moving average coming it at 2600, both the 4 hour and daily cycles are high, and price is nearing the top of the regression channel that you can draw off the lows. The red parallel lines of the regression channel represent one standard deviation and capture both the bottom and top of the market’s range recently.
All of these factors have stacked up, resulting in a high probability that the market will fail from a time perspective either today or tomorrow. From a price perspective, this area gives a good edge to short from. Specifically, if the market gives me one more push into that previous support sell-zone area, then I’m going to try to start rounding out the top and shorting futures, then look to add to my position once the near-term breaks or rolls over. The risk to this short would be above 2600; I’ll give it 30 points or so.
We also have a Swing Line sell set up around 2640 (the dashed red line in the graphic above) that’s just a little bit shy of the bands that are descending coming into that same spot. That would be the next level to expect a lower high but I really think the market will struggle to get above the zone that I’m talking about.
Implied volatility levels are really low as well. When you look at the daily timeframe, each time we’ve had significant lower highs in the S&P 500 it’s kind of been right around the 0.20 area on the implied volatility scale. We when look more intra-day, the level is actually a little bit deeper in the zone, towards the 0.16 level.
You can see that with both of the last 2 significant short selling opportunities (marked in yellow), we had implied volatility go as deep as 0.16-0.17, so that’s still a possibility again. I did buy the VIX today, I like that we’re back long bonds – all the same stuff that’s been working for us.
That’s the game plan, I hope this helps you.