Wednesday, August 10, 2011

Market Watch: SPX

Well there it is, take a good long look at it. Look at the break below 1250. That is one of the greatest downward moves you'll ever see. If my arithmetic is correct the SPX spent seven days under the Bollinger bands and even after yesterday's rally we are still under them.

Is it over? I don't know, but we finally did get an a up day. The key to me is that after big pullbacks like this we usually get a short covering rally first. Think about us, we were short the SPX. To get short we had to first sell the SPX, and then we had to buy it back to close out our position. That is what everyone else in the market is doing as well. All of that short covering causes temporary spike in prices, but it does not constitute a trend change.

Most likely what will happen is that the prices will go up to some place under 1250, but probably not that high. Then they will fall off again as short covering dries up most likely all the way back down to about 1100. That will be the decision point. That's when we will see if the bottom is in or if the route will continue.

So, do you trade this rally? It depends entirely on personal choice. You can try to catch the rally as a swing trade and then get out as it falls back if you can be nimble enough. It's kind of like playing video games only if you go outside the lines you lose money. But I suggest waiting to see if what I talked about takes place. Namely if the SPX puts in a double bottom, then that would be one of the safest trading strategies you could make.

The long and short lines I think are 1250 and 1100 respectively. 1250 is prior support so that automatically makes it resistance, but that does not mean that the SPX will approach anything near 1250 in the near-term. You can see that 1100 acted as support back in September of last year and again yesterday. So, for now we have to consider 1100 as support.

Remember we are waiting for signs of a double bottom before going long this index.

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