Daniel Urdaneta


FX:SPX500   S&P 500 Index
THe S&P 500             reached it's bullish target at the 2000-2020 area (around 200-day MA on the daily chart ) with a solid W-shaped recovery not unlike the one experienced on Q32015.

There are a couple of technicals that I'm using as a rationale to open short positions from current levels:

1. Lower lows on Jan-Feb,
2. RSI about to hit Overbought on the Daily chart .
3. MACD is in a bullish trend , but losing momo (check the lower highs on the MACD histogram).

Market Sentiment:
The vicinity of the 200-day MA saw some back-and-forth during Q42015, and there's reason to believe Spoos will act the same this time; some of the main headlines/themes of 2015 (China deceleration, World economy losing steam, "limits of Central Banks", etc) are being repeated on financial media this year.

1. EPS             continue to be revised down, with Energy reporting worse than forecast losses during the last earnings season;
2. Lots of institutional selling from hedge funds and also from sovereign wealth funds. A reliable base bid is becoming an ever-present heavy offer..
3. Distortion in relative valuations: S&P 500             is just a measly 5% off its all-time highs; meanwhile, almost every other risk asset class worldwide is just off multi-year lows. EM Equities and Euro             Banks, in particular, are at levels below the 2009 financial crisis lows. This should place downward pressure on the Spoos, at least on a relative basis vs. these and other risk assets.
4. Policy divergence is still in play: The recovery in macro sentiment has raised again the implied odds for fed funds rate increases, and now Wall St             expects 1-2 hikes for 2016. The ensuing tightening of financial conditions should at least deter marginal buyers at current levels (who's gonna be willing to buy US Equities, the most expensive risk asset in the world, at prices more than 10% above the recent market lows?)

Since this is a counter-trend trade, and I'm not sure on which would constitute a "top" in this upmove, I'd play the trade like this:

25% of the trade allocation would be on a limit sell order from 2032 (+0,5% from Friday's close), with a stop above the major resistance level of 2090, and a target of 1840, with a cool 3.18:1 Risk/Reward.

75% of the trade allocation would be left for day-trading the ensuing market bounces. I'll have the flexibility of taking the long side strategically a couple times, but short is going to be the default stance, as long as the 200-day MA doesn't act as major support from now on (I doubt it). I usually use a stop loss of 1% against the position, and 2% as take profit, with the allowance to re-enter the trade if the played trend remains solid.

Best of luck!
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