S&P 500 Update: The selling continues….
Friday, August 19, 2011: If I was not so busy during the day, I doubt I would have passed up the juiciest shorting opportunity to present itself for quite some time:
After the sell signal issued just below 130 in late July, the market gave a beautiful (from the short side) highly profitable plunge all the way down to 110. One way to play these waterfall declines is to place a trailing stop at yesterday's high - such a stop would not have been hit until just above 116 for a 14 point profit in 10 days.
But if you missed this signal, you should have been setting up for the next. Markets rarely form Vs and almost always rally off a bottom, sometimes sharply, then take back a third or a half of the declines. Then this rally stalls and the market tends to resume the downtrend, testing or breaking the prior lows. Most successful tests lead to what looks like a W formation on a chart.
So as the market rallied off the 110 low, several things should have alerted you to the rallies imminent failure, allowing you to re-enter on the short side for the next leg down.
Volume was the first clue: it was much lower (and ebbing) on up days than it had been on the most recent down days.
Price was the next clue: the market rocket higher only to stall out about where you would expect it to, about a third of the distance from the high of 135 to the low of 110, or 1/3 of 25 points or about 8 points, added to the 110 low = 118. The market punched above this a bit then stalled. Finally, today, it sold off on very heavy volume. Expect a test of 110 with the weight of evidence on the bulls to explain why the market should not fail this test.
August has been a horrible month, taking the place of September, as seasonality has started to shift.
Stay tuned.
Friday, August 19, 2011: If I was not so busy during the day, I doubt I would have passed up the juiciest shorting opportunity to present itself for quite some time:
After the sell signal issued just below 130 in late July, the market gave a beautiful (from the short side) highly profitable plunge all the way down to 110. One way to play these waterfall declines is to place a trailing stop at yesterday's high - such a stop would not have been hit until just above 116 for a 14 point profit in 10 days.
But if you missed this signal, you should have been setting up for the next. Markets rarely form Vs and almost always rally off a bottom, sometimes sharply, then take back a third or a half of the declines. Then this rally stalls and the market tends to resume the downtrend, testing or breaking the prior lows. Most successful tests lead to what looks like a W formation on a chart.
So as the market rallied off the 110 low, several things should have alerted you to the rallies imminent failure, allowing you to re-enter on the short side for the next leg down.
Volume was the first clue: it was much lower (and ebbing) on up days than it had been on the most recent down days.
Price was the next clue: the market rocket higher only to stall out about where you would expect it to, about a third of the distance from the high of 135 to the low of 110, or 1/3 of 25 points or about 8 points, added to the 110 low = 118. The market punched above this a bit then stalled. Finally, today, it sold off on very heavy volume. Expect a test of 110 with the weight of evidence on the bulls to explain why the market should not fail this test.
August has been a horrible month, taking the place of September, as seasonality has started to shift.
Stay tuned.
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