It is important to understand where this market is, and how its current behavior tells a story behind the price action. The 2710 to 2751 is the .618 area of the recent swing. When price is in an area like this, it is usually better to sell, or avoid, not buy. Unless there is an absence of selling which is what is happening here.
Usually, when price reaches a , it is rejected quickly. When price is not rejected, that means there is no real selling pressure. The shorts that are positioning themselves are going to provide the order flow and momentum as motivated buyers once an appropriate catalyst invites new buyers. This short squeeze is often what leads to a break out and 2740 is the number we are watching for that.
Triangles or consolidations serve as trend continuation patterns. And as long as the 2685 level (.382 of current structure) is not taken out, this market is likely to continue higher. This is why we believe the current price structure and formation is a recipe for a summer rally.
As I wrote in detail in my article on S.C. earlier today, there are many ways to participate in a market environment like this. Since we manage a number of portfolios at S.C., one of the strategies that we employ is selling naked puts. Yes in general a short put is risky and ties up a lot of margin, but we do this with particular stocks that pay dividends, not speculative stocks.
In a slow grind environment, front month puts sold at the right time can provide a nice way to capitalize on the range bound environment. If the market falls apart and you choose to take delivery, you are essentially getting paid to own a good stock that you can then collect dividends and sell calls on.
In summary, the S&P is a not only a broad index to measure fund managers against, but it provides a lot of useful information to base other decisions on. Knowing that the stock market is generally strong and still has more potential (2800 to 3K over next 6 months) provides a framework to manage your portfolio within. Whether you want to trade outright contracts, the or timing portfolio decisions, there is plenty of opportunity. It all depends on your style and how you manage risk. At S.C. we employ multiple strategies, across a variety of instruments. Options are just one way to play. Make sure to check out today's article and performance page.
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