Thursday, July 1, 2010

Ruh Roh

On the initial retest of 1040 back on June 7th, I offered up an SPX chart with potential downside targets in my post titled On the Brink. Well, after holding the low and taking a one month detour the SPX has once again returned to this infamous line in the sand. Though this time the bears came back with a vengeance and finally mustered the strength to breach this long time support level. The aforementioned detour turned out to be the formation of the right shoulder of a longer term head and shoulders pattern six months in the making. Rather than highlighting potential fib levels as displayed last month, today's graphic focuses on the topping pattern recently completed with two potential downside targets - the prior key resistance of 950 and implied target of the head and shoulder pattern. It strains the obvious to point this out, but keep in mind these are longer term levels to watch out for and aren't necessarily in play over the next few days (click image to enlarge).
[Source: MachTrader]

For related posts readers can check out:
Head & Shoulders, Knees and Toes
Lines in the Sand

5 comments:

Steve said...

Tyler,

When I did some FIB retracements from a few different angles I a small potential support at 1000 but more so down to about 985ish. So it looks like the SPX may have a new trading range? Is the H&S target because that is where the left shoulder started to form?

For once I can say I saw this coming and traded accordingly!

Tyler Craig said...

Hey Steve,

Glad to see you got a good read on the market and were able to place some profitable bets accordingly. As for the trading range, I suppose it depends on your time frame. Heck every stock is in some type of range on a large enough time frame.

To forecast a target on a head and shoulders pattern you measure the distance between the head (1220) and the neckline (1040) and then subtract that from the neckline. So 1040 minus 180 gets us around 860.

tjktrader said...

Thanks Tyler for a blog on good ole TA. The pattern seems so clear and fundamentals are behind it.

Questions -
1.if this continues to breaks down when does it confirm a long term secular bear market?
2. do you think we retest 1040 as resistance next?
3. What plays are you planning for the down move? Buy puts, buy vertical put spreads, short futures, other?.

(I would like to make good use of leverage and strategy to profit on a move that seems clear - yet my bearish holds in the summer of 09 and feb-10 hurt, so I hope to better plan for what I don't expect this time)

Tyler Craig said...

1. Honestly I don't know. Whether this turns out to be a week long downtrend or the start
of a plummet back down toward the 09 bear market lows, time will tell... Based on the head
and shoulders pattern I think the downtrend could persist for awhile, but I'll definitely
keep an eye signs of a bottom when/if it happens. Like any other scenario where we have a
market bias, just be on the lookout for signs that we're wrong (such as breaking resistance).

2. No idea. It would make sense and would serve as another example of prior support becoming
resistance. If the market does retest it and it holds as resistance, then it could be an
opportunity to enter new bearish trades.
3. Keep in mind selecting strategies comes down to time frame, personal preference, risk tolerance, etc... I would not be shorting futures unless I was day trading. Long puts, bear risk rockets, short call spreads,I think they're all legit ways of playing the downside. Timing is still important though. I'll be looking for strategic low risk, high reward entries like retracements and breakdowns.

As far as stopping the bleeding if the market does a fakeout like Feb-10, just make sure you keep your
position sizing appropriate and have a game plan for exit.

QUALITY STOCKS UNDER 5 DOLLARS said...

Great info on the markets overall.