Monday, June 27, 2005

Keeping an Eye on the Big Picture

It pays to give the major indices attention every day. When the S&P failed to make a new high before rolling over starting last Thursday, it set the stage for a head and shoulders top. This means the market is incredibly vulnerable to any sort of financial accident right now because the smart money is on the run. If the S&P does not make a new low near 1135, then a bullish cup & handle (bear trap) may form instead. On the attached chart of the S&P500, I'm looking at the 50-day moving average and the lower-channel line I've drawn to act as support for this possible cup & handle pattern to form. Also note the volume at the bottom of the chart. Although the recent volume is big, signaling distribution, it hasn't ballooned like it did during April's sell-off.

I'm adjusting my exposure accordingly. Its a juggling act, but you can't rest on your laurels and expect outperformance. Three trading days into the sell-off and I've went from ~140% net long to ~35% net long. The selling comes two-fold, I'm selling stocks short and I'm organically stopping out of longs. In some cases it is tempting to buy the longs back at the close if they haven't collapsed but I have not been doing that yet. If the identified support on the S&P fails, then I'll be moving to a net short position, otherwise I think we're be looking at a buying opportunity after the fed meeting this week.

Stephen Vita, over at the Alchemy of Finance gave a somewhat more bearish sounding assesment of the market this Sunday, right here. Its worth a read if you haven't seen it. Stephen is privvy to better information than I am, so I pay attention when he's got something to say.


At 11:57 PM, Blogger jontait said...

I just noticed Trader Mike has a major indices chart analysis from yesterday here. He has pointed to similar support levels as I have.


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