We all know that the S&P 500 had been stuck in a choppy range-bound trend since the start of the year - counting from its start on February, that's almost 5 months! We also know that the last three trading sessions have, at last, completely destroyed the stalemate. So naturally, the question on everyone's mind is: What's next?
The simple question that we all ask ourselves every day as speculators may not be so simple once we account for the fact that the S&P 500 stands on a critical junture. A fall from the 1970s could mean a straight highway to the 1820s (October 2014 lows) - the author believes that the 1900s level (August 2014 lows) seems more realistic. A recovery from where we are could lift the ever-bullish index to at least 2040s - the once steadfast support level that we tested 3 times this year.
Given the price range, any rationale trader would conclude that a short position should be in order. Why? Because if you construct a hypothetical trading plan based on the price range (enter short @ 1971, stoploss @ 2040s, Target @ 1820) you end up with a trade that has a nice R/R ratio of 2.32. Now, I know you profit-thirsty and nimble traders out there will call this a bullshit and ask, "Who would wait until 2040?" So, let's make some adjustments. If you shorted now and set your stoploss at 1994 (roughly a 1% from where we are now), you end up with a stunning R/R of 7.45. A 7.45! Who would give that up?
Although the prospect of going short sounds very promising especially after months of dull rangebound market, I would like to ask you, What are the odds?
I know China's Yuan devaluation and recent PMI numbers offer disappointing growth prospects. I am also aware of the fact the US rate hike is probably on its way (although the FOMC implied on its latest minutes that it'd rather stand aside and watch - check the Dollar index!). Furthermore, stocks don't always need a definite reason to crash. But to see a move from the 2132 (year high) to 1982, a 14.62% move, I say there needs to be a stronger catalyst before we turn 100% bearish. The catalysts could range from a declaration of bankruptcy from a major firm (be it financial or not), an extremely hawkish statement from the Fed, random outbursts of fiscal/monetary policies from China, to a systematic breakdown of the shadow banking system (Lehman Bros II anyone?).
So, what's next?
Given the rapid fall to the '2' level of the Fibonacci extension (1969.4), I have a strong feeling that a rebound is in order. What happens after is uncertain as we may climb above 2040s only to succumb to the 200MA or fall back down before reaching 2040s.
All I know is, I'm entering long position with a stop loss of -1% (1954.1) with the target of 2022 (the 1.236 extension). That should, if it works, provide me with a amiable R/R of 2.48.
The simple question that we all ask ourselves every day as speculators may not be so simple once we account for the fact that the S&P 500 stands on a critical junture. A fall from the 1970s could mean a straight highway to the 1820s (October 2014 lows) - the author believes that the 1900s level (August 2014 lows) seems more realistic. A recovery from where we are could lift the ever-bullish index to at least 2040s - the once steadfast support level that we tested 3 times this year.
Given the price range, any rationale trader would conclude that a short position should be in order. Why? Because if you construct a hypothetical trading plan based on the price range (enter short @ 1971, stoploss @ 2040s, Target @ 1820) you end up with a trade that has a nice R/R ratio of 2.32. Now, I know you profit-thirsty and nimble traders out there will call this a bullshit and ask, "Who would wait until 2040?" So, let's make some adjustments. If you shorted now and set your stoploss at 1994 (roughly a 1% from where we are now), you end up with a stunning R/R of 7.45. A 7.45! Who would give that up?
Although the prospect of going short sounds very promising especially after months of dull rangebound market, I would like to ask you, What are the odds?
I know China's Yuan devaluation and recent PMI numbers offer disappointing growth prospects. I am also aware of the fact the US rate hike is probably on its way (although the FOMC implied on its latest minutes that it'd rather stand aside and watch - check the Dollar index!). Furthermore, stocks don't always need a definite reason to crash. But to see a move from the 2132 (year high) to 1982, a 14.62% move, I say there needs to be a stronger catalyst before we turn 100% bearish. The catalysts could range from a declaration of bankruptcy from a major firm (be it financial or not), an extremely hawkish statement from the Fed, random outbursts of fiscal/monetary policies from China, to a systematic breakdown of the shadow banking system (Lehman Bros II anyone?).
So, what's next?
Given the rapid fall to the '2' level of the Fibonacci extension (1969.4), I have a strong feeling that a rebound is in order. What happens after is uncertain as we may climb above 2040s only to succumb to the 200MA or fall back down before reaching 2040s.
All I know is, I'm entering long position with a stop loss of -1% (1954.1) with the target of 2022 (the 1.236 extension). That should, if it works, provide me with a amiable R/R of 2.48.