Friday, July 17, 2009

Has anything really changed here?

Take a look at the charts, has anything really changed to you? No, if anything this pattern appears to be more convincing with the symmetrical double shoulders on each side. As I said yesterday I believe the fuel to the fire of this last 4 day rally has come from short covering. I hear even on CNBC people talking about the head and shoulders pattern and the critical neckline price level around SPX 875. The problem is they never said anything about the double shoulders so the potential to rally was there to form the second right shoulder, I believe a lot of shorts entered the market Friday and/or Monday and they all have paid the price for it.

For those of you looking for a good time to go short now is a good time, let me tell you why. See there is no sure thing in the markets you need to look for the highest risk/reward ratio utilize proper risk management and go for it. Whatever your trading vehicle of choice whether it be SPY, SDS, ES, SRS and so on. Put a stop just above the head price level at approx 956 SPX.

The probabilities of this pattern working itself out shortly are high, not 100% but high. Your price target if we calculate the breaking of the neckline using TA would be about 800 SPX and we also have a 61.8 Fib retracement at around 780 SPX. So if you short with a stop at 956 -960 SPX, worse come to worse you get stopped out, your risk would be 20 points or so, your reward however could be 100 - 150 points if this pattern plays itself out!

Remember though trade your portfolio only, do not trade with money that you can not afford to lose, I can not stress that enough!!! If you can't take that type of drawback, do not trade futures wait for more confirmation signals or try a less risky vehicle like SPY puts. Also if you want to try to pinpoint a possible more precise entry point watch for the bearish cross on the 60 min MACD on SPX. That may give you a better shot at an entry point without having to average down and take the dreaded drawback heat!

Again good luck to all!