Monday, 4 July 2011

Is This A Fade?

The rally overseas has run right into my target zone. And then some. It always amazes me how the market can go from one extreme to the other in such a short space of time. Time to switch off the guns from one of my posts only a few days ago:

As traders this is what we crave but you just have to be willing to develop that low risk idea and understand the nature of the market. The best time to be short is never after a protracted decline off a new market high. In fact, there is only a really a short window of opportunity to really make money from being short equities ever, especially in this bull market. This is the reality how the equity market operates and the reality of a 0% interest rate environment.

Much as I was looking to buy in the low end of the range, I would be looking for low risk short opportunities at the top end of the range. This is a short term trade only for now given this is a fade trade vs a new trending up move. The market is going to do a few things here: it may continue to move higher and advance towards the previous high at 1370; more likely there may be a brief "pause" and retracement back to 1320/1315 before the highs can be reached; or the market will fail spectacularly and trap all the bulls leading to a genuine market top and lower high. Obviously I don't know which scenario the market will follow but in 2 out of 3 of those scenarios mentioned, I make money by shorting here. Makes sense to me to short first with tight stops, and join once more if the rally is the real deal.

S&P 500 Daily:
This is my target zone. I like 1340 to 1345 as short levels. This is the 76.4 fibonacci retrace, the high of the previous breakdown candle, and strong overhead resistance. A high here would make for a nice Head and Shoulders pattern indeed.

Once more to illustrate what happened at the high in Oct 2007. The market broke out of an ending wedge pattern but ultimately ran out of steam right at the 61.8 to 76.4 fib target zone. That huge bearish reversal candle set the stage for a real panic sell off. If we are to continue to follow this parallel, look for similar confirmation and it has to happen NOW.

S&P Daily Oct 2007:

Given it is a public holiday in US, it will be interesting to see if anything comes out of European trading tonight. Asia has been relatively lacklustre today and I will put up a more meaningful post after todays close.