Turned Down TemporarilyThe SPX ran into some selling further below R1 than I had expected and has dropped back just a bit. It ain't over. I expect a real test of R1 to occur in the near future.
The uptrend line S2
One of the most repeating patterns I've watched over the last 20 years is how off lows in every timeframe, the SPX will start a 'V' bottom, move sharply higher, then correct down a little. Buyers than missed the sharp up move come in so quickly that the SPX resumes its move up. Very often a line drawn off that first low at an angle half as steep (or less) as the initial sharp move becomes the dominant support for the uptrend. (We've quantified historical probabilities for that slope in the past and are currently revisiting/updating that topic.) We first mentioned S2 in it's very early stages of formation and it remains a factor. For now I feel that S2 and R1 are going to determine which way the market turns. Since those lines are converging, the SPX is going to break one or the other soon.
Let me be perfectly honest here.
I've watched, researched, and traded "the market" now for nearly two decades. I diversify my business/investment activities widely but the majority of my research is purely on how to predict markets. Having said that, I really have no idea whether the SPX is going to break out above R1, or fail and move lower. I believe that buyers and sellers are battling right now and the winner of that battle, probably with the injection of some unpredictable and surprising event, will determine whether R1 is overcome or not. Any advisor who states that the market is going much higher from here is stating R1 will be overcome and that is simply a guess. Nobody has a crystal ball.
Since I don't know,
I have two choices. One is to "wait and see" and possibly miss out on what could be a spectacular up day as the break occurs. Frankly, this tends to happen to me quite often because I am generally risk averse and buying near resistance is risky because resistance "should" turn turn the market lower. However in this case, its rare that another buying opportunity doesn't come along on a pullback if I'm patient. My second option is to find another good reason to get long on a shorter-term basis with an exit strategy and possibly luck into being long on the breakout day. This happens for me fairly often as well.
In the intraday chart we had some very interesting action at yesterday's close and today's open. As you can see in the chart above, a well defined downtrending channel had formed. In the closing minutes the SPX broke out of that channel. That implies some really felt like there was going to be an upside surprise today. Unfortunately, that breakout was false and the SPX dropped back today to the bottom of the channel. Today's open also gapped down.
Between two gaps.
So we're now trading between two unfilled gaps which may set up an interesting opportunity. If the channel fails, I'll expect a drop equal to the width of the channel down to around 805. Another possibility is that the SPX just rides the channel down in the next few days, eventually getting down to below 815. In either of those cases, I plan on entering the market long hoping for a pop higher to fill the overhead gap at 840. Entering at 815 and selling at 840 is about a 4.5% profit in Rydex Nova which would be my main goal. My secondary goal would be to luck out and be long as some event based surprise launches the market through R1. With the restrictions that come with end-of-day trading some luck may be required to pull it off within the restrictions I'm under with this space. Honestly, I may have to play this one mostly with options, which is beyond the scope of what I can detail here. (You think trading markets is hard? Try doing it while at the same time telling others your plans in advance...) In any case, with 26 minutes left it's unlikely anything will happen today. But I'll definitely indicate any end-of-day actions I plan to take in the coming days.
Turned Down Temporarily
