The market’s three-day-run has the bulls claiming that the market is set to regain its highs and move through higher through the summer months. A closer look at the technical picture paints a different scene as the S&P 500 and other indices are already running into technical resistance.
Click to Enlarge A look at the S&P 500’s daily chart reveals that the market rallied right up to a confluence of resistance from three different technical trendlines.
First, the SPX’s 20- and 50-day trendlines are executing a bearish crossunder pattern at the 1,621 level (labeled “1”). This point draws technical resistance at this point, but also forecasts that SPX prices will decline as the short-term trend has transitioned into a declining pattern.
Second, the SPX failed to break back above the median trendline (labeled “2”) of a new bearish regression analysis channel that began with the market’s top in May. This failure signals that the SPX is likely to move back towards the lower channel of this trend, likely to be a minimum move to 1,570.
Finally, the SPX failed to break back into its bullish regression analysis channel that dates back to the beginning of the bull run in October 2012 (labeled “3”), confirming that the short-term shift in the market is becoming stronger than the recent short-term buying can overcome.
For now, short-term traders may want to add short exposure given the growing likelihood that the short-term bounce could be nothing more than a dead cat. Two investment allocations can prepare a portfolio to profit from the potential for another short-term decline. First, the Proshares Ultrashort S&P 500 ETF (SDS). These shares go up two percent for each one percent decline in the SPX.
Those looking for a more leveraged approach might consider buying a put option on the S&P 500 ETF (SPY). Looking over the short-term, the July 160 put would provide the potential for investors to profit from a decline to our target of $156 on the SPY. Currently trading for about $1.80, these options are likely to more than double in value upon reaching our target within the next two weeks.
Trader X frequents national investment conferences and has developed several market analysis tools that harness the powerful combination of behavioral analysis and technical analysis. He has decades of experience as a registered broker.
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