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How to Trade This Headline Driven Stock Market

ilene's picture




 

Courtesy of Chris, The Gold and Oil Guy

With all eyes on the unemployment report and Europe, the CME Group’s PR Department nearly created an all out panic with their announcement after the market close on Friday relating to futures maintenance margin. The original statement was vague and I was quite concerned until I checked out the CME Group’s web-page and the PR Department sent an update clarifying their position. At this point I think the crisis has been averted, but this is just another reminder that we live in “interesting times.”

Keep in mind that if the CME starts raising margin rates across the board for futures contracts in order to protect themselves stocks and commodities could collapse. Silver recently has is margin rates increased and silver since then dropped 25% in value. So imagine if they raised the rates for more commodities…

The current price action in the marketplace pales in comparison to the world’s geopolitical tensions and deteriorating social mood. In my trading career, I have never seen the price action in the indices react so violently to intraday headlines and rumors. Risk is high and the types of traders profiting from this market are day traders and very short term traders with trades lasting just a couple hours to 24 hours in length. Aggressive trading which small position sizes is all that can be done right now. This is not meant to be investment advice, but more as a function of the market environment in which we find ourselves currently trading within.

Right now it is hard to say where price action in the broader indices heads in the short-run. One headline out of Greece or Italy could dramatically alter economic history. In the intermediate term I remain neutral to bearish for a number of reasons. One indicator I follow is the bullish percent index on the S&P 500 which at this point is arguing for lower prices.

The chart below illustrates the S&P 500 Bullish Percent Index:

How to trade S&P 500 Headline Driven Market

As can be seen above, the S&P 500 Bullish Percent Index is presently at an overbought status. When looking at the relative strength and full stochastics indicators one would argue that a pullback is warranted. Historically when the S&P 500 Bullish Percent Index is this overbought, a pullback ensues which ultimately sees the S&P 500 Index selloff. The more arduous task is trying to determine just how deep the pullback on the S&P 500 Index might be.

It is critical to point out that while I do believe a pullback is likely, I will not rule out a rally into the holiday season. Much of the near-term price action is going to be dictated by headlines coming out of Greece and the rest of Europe. In addition to Greece, Italy is also starting to see increased concern regarding an unsustainable fiscal condition. Depending on how the European Union handles the varying degrees of risk in the near term, we could see price action react violently in either direction.

With the market capable of moving in either direction, I wanted to point out some key price levels which should act as clues regarding potential future price action in the S&P 500. The two key support levels to monitor on the S&P 500 Index are the 1,240 and 1,220 price levels.

The daily chart of the S&P 500 Index below illustrates the price levels:

How to Trade Large Cap Stocks

For bullish traders and investors the key price level to monitor is the recent highs on the S&P 500 around the 1,290 area. The weekly chart below demonstrates why this price level is critical and which overhead levels will offer additional resistance should the recent highs be taken out to the upside.  (I give trading alerts to subscribers based on monitoring the indexes, click here to learn more.)

SP500 Weekly Chart Analysis:

How to Trade Weekly Charts

While I am neutral in the intermediate to longer term presently, in the short run I have to lean slightly bearish simply because of the future headline risk and also because a major head and shoulders pattern has been carved out on the hourly chart of the S&P 500 Index. This type of chart pattern is synonymous with bearish price action.

The hourly chart of the S&P 500 Index is shown below:

How to Trade Hourly Chart

Right now I remain slightly bearish, but should the head and shoulders pattern fail and/or we begin to see multiple positive reactions to news coming out of Europe, a strong rally into the holiday season is likely. Unfortunately all we can do is monitor the key price levels and wait patiently for Mr. Market to tip his hand.

Until we see a breakout in either direction, we could see price action inhabit the 1,220 – 1,290 price range for several weeks before we get any more clarity of future direction. Until I see a breakout, I will remain relatively neutral with a slight short term bias to the downside based on price patterns in the shorter term time frames. This is a tough market to trade in, and I don’t want to get chopped around or do any heavy lifting. I’m going to focus my attention on high probability, low risk trade setups until directional biased trades make more sense.

In closing, I will leave you with the thoughtful muse of the late Texas Congresswoman Barbara Jordan,

“For all of its uncertainty, we cannot flee the future.”

 

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Tue, 11/08/2011 - 12:06 | 1856629 jimmyjames
jimmyjames's picture

1/3 long--1/3 short--1/3 cash--mental stops only and always a core position in physical gold and major miners which are never traded and always added to on severe pullbacks-

Tue, 11/08/2011 - 11:29 | 1856427 banksterhater
banksterhater's picture

bullish percent is at extreme, trade at your own perril. Any gains from here will be wiped out in a few hours. Good article.

Tue, 11/08/2011 - 10:05 | 1856089 spinone
spinone's picture

The only way to trade this market is with inside information, or frontrunning your clients.

Tue, 11/08/2011 - 10:31 | 1856194 Sockeye
Sockeye's picture

Sad but true. Us "little" guys need to think of tradingand investing in something other than these broken and corrupted markets.

Tue, 11/08/2011 - 08:46 | 1855940 sumo
sumo's picture

"One headline out of Greece or Italy could dramatically alter economic history"

thereby making T.A. one step below astrology in predictive power.

Tue, 11/08/2011 - 11:15 | 1856359 CvlDobd
CvlDobd's picture

TA is about probabilities not predictive power. It gets a bad rap because of the morons that tout its predictive power. Probabilities and risk management via position sizing are the name of the game IMO.

Tue, 11/08/2011 - 06:24 | 1855807 Bahamas
Bahamas's picture

Head and shoulders ...long shampoo

Tue, 11/08/2011 - 04:32 | 1855757 Barry Lincoln
Barry Lincoln's picture

From Wikipedia on characteristics of the Head and Shoulders chart:

  • Most of the time Head and Shoulders are not perfectly shaped. This formation is slightly tilted upward or downward.
  • One shoulder may appear to droop.
  • On many chart patterns, any one of the two shoulders may appear broader than the other which is caused by the time involved in the formation of the valleys.
  • The neckline may not be perfectly horizontal; it may be ascending or descending.
  • If the neckline is ascending then the only qualification of the formation lies in the fact that the lowest point of the right shoulder must be noticeably lower than the peak of the left shoulder.

Is this a joke? Who takes this technical analysis voodoo seriously? Who invests their money by looking at a chart and determining if there's a "droop" or a "noticeably lower" feature? 

 

Tue, 11/08/2011 - 01:14 | 1855614 Dirtt
Dirtt's picture

Nothing matters until it does.

Stable principal and patience are not sexy.  But if you aren't ready to pounce than nothing matters.

So everyone hates technical analysis. No one believes fundamentals. And the default beyond that is "Gold bitchez."  Sounds like everyone is saying the same thing. Again.  Why the constant hostility towards the contributors?  It's not like he is trying to sell you Chinese solar penny stocks.

Tue, 11/08/2011 - 00:32 | 1855555 dumpster
dumpster's picture

95 percent of traders loose. zero sum game over a select time frame .

the boyzz front run.. why aways the painted charts .. is if it means squat.

and if the traders were so dang good why would they want to post their game plans on a web site ...

make no sense except to yadda yadda ..

and to secure a place in hubris and twaddle

 

 

Tue, 11/08/2011 - 00:24 | 1855535 Godisanhftbot
Godisanhftbot's picture

 All known patterns have been deconstructed, gamed, frontrun, and rendered useless for profit.

 

 Other than that, its an easy game.

 

 

Mon, 11/07/2011 - 22:15 | 1855320 PulauHantu29
Mon, 11/07/2011 - 21:38 | 1855278 Lady Heather...UNCLE
Lady Heather...UNCLE's picture

...meaningless article. Paradigms have shifted. Trade off old fashioned technicals at your peril. Buy dips and sell rally (or vice versa but at a lesser frequency by about 1/3). Almost every day the market moves around 1%. At leverage of 100:1 you double your money every day. Ten business days later you will turn $1,000 into a million. For my FREE newsletter on how to trade this market and to secure your finances for the turmoil ahead, ph blah blah blah.

Mon, 11/07/2011 - 21:29 | 1855259 dirtbagger
dirtbagger's picture

After pissing away 1,000's of hours on charts, balance sheets, cash flows, trend lines, fibrioni retracements, news letters, mathmatical momentum models, dow theory, moving averages, micro/macro fundamentals, etc, etc,etc,.  I suggest either throwing darts or buying some PM's

Mon, 11/07/2011 - 23:35 | 1855456 JuicedGamma
JuicedGamma's picture

Make sure to hire monkeys, Wharton MBAs suck at dart throwing.

Tue, 11/08/2011 - 04:31 | 1855756 Ratscam
Ratscam's picture

Hey I'm good at throwing darts, even better playing 8 balls, everything else I forgot.

Doesn't matter in these rigged financial markets.

Tue, 11/08/2011 - 04:27 | 1855751 OldPhart
OldPhart's picture

It's those limp wrists.

Mon, 11/07/2011 - 21:08 | 1855232 ebworthen
ebworthen's picture

In the context of all the "unprecedented" levels and events of the past three years I doubt that technicals such as support levels hold much water.

When the SHTF technicals won't mean anything.

Agree with you that this is a highly risky market.

A majority of household balance sheets are in the red; and sooner or later these will trump the mark to fantasy books of banks and governments and kill the bottom line of the "cash rich" corporations.

Mon, 11/07/2011 - 20:42 | 1855197 navy62802
navy62802's picture

Anyone who tells you that he/she knows how to trade this market is either a crooked insider or is lying to your face ... third possibility is that they're making an attempt at humor.

Mon, 11/07/2011 - 20:21 | 1855157 bill1102inf
bill1102inf's picture

HEAD shoulders knees an toes, KNEES AND TOES!!!

Tue, 11/08/2011 - 04:26 | 1855749 OldPhart
OldPhart's picture

KNEES AND TOES, KNEES AND TOES, KNEES AND DIRT, KNEES AND CHINA!! KNEES AND ACTURIS.

Mon, 11/07/2011 - 20:03 | 1855121 razorthin
razorthin's picture

Based on monthly charts, it is looking like Dow 14000 through though next couple of quarters.  I hate it too and think it is fundamentally BS, but that's what I see.  It's pure monetary inflation.  The good news is that PMs will act accordingly.

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