Developing market tops are inherently difficult to navigate. Up -down-up-down-sideways, with no real net progress, is often the end result. Case in point, the S&P today is pretty much where it was three month ago.
I use support/resistance levels as the picture frame or outline for the big picture outlook. The key resistance levels for the beginning of 2012 for example, were 1,325, 1,369 and 1,425. A move above each resistance level would point higher.
The S&P stalled at 1,325 in January but broke above it, which pointed to 1,369. The S&P stalled at 1,369 in February but the February 17, ETF Profit Strategy Newsletter pointed out that: “A break above 1,369 would unlock more bullish potential with 1,425 as target.”
The S&P (NYSE:SPY) got as high as 1,422 and took a nasty tumble. It’s been interesting to see how the S&P interacted with support/resistance levels since.
The First Real Signal to Go Short
Based on the composite of technicals (including support/resistance levels), seasonality and sentiment, we didn’t really get a signal to go short until last week. Things started falling into place early May.
The May 2, ETF Profit Strategy update highlighted the S&P 1,390 range as important support when it described that: “S&P 1,390 is this week’s pivot and a range of support/resistance congestion at 1,387 – 1,393 made up of last month’s pivot at 1,389, this month’s pivot is at 1,393 and prior March/April highs/lows.”
The recommendation in the March 3 ETF Profit Strategy update read as follows: “A move below 1,386 will be a sell signal for aggressive investors.”
The drop below 1,386 occurred the next day and resulted in a 40+ point decline.
The next key level surrounded the 1,357 – 1,366 range, which was expected to be broken. This happened Wednesday.
Yesterday’s ETF Profit Strategy update referred to short-term bearish percentR low-risk entries, which suggested lower prices for today. The update however cautioned that:
“The immediate down side is limited to around 1,340. Scale down short positions around 1,340. Aggressive investors may nibble on some long positions on a drop below 1,340.”
Of course resistance is now at 1,357, the precise level that’s kept a lid on today’s bounce.
A Traders Delight
Admittedly this kind of micro-managing is only for active aggressive investors, but shows that it is possible to navigate a seemingly directionless market. And there are traders that use leveraged ETFs like the UltraPro Short S&P 500 ETF (NYSE:SPXU) or Direxion Daily Small Cap Bear 3x Shares (NYSE:TZA) to take advantage of small moves that can result in big gains.
The ETF Profit Strategy Newsletter uses a composite of indicators to identify key support/resistance levels and provides a short, mid and long-term forecast for stocks. The key focus right now is on the key support that – once broken – would point to the next bear market leg or the indicator that may trigger an unseasonally strong summer rally.