Regardless of whether you believe today’s headline drivers, on the price chart both the S&P 500 and Nasdaq 100 are in position for traders to profit — first as bears, then as bulls using the SPDR S&P 500 ETF Trust (NYSEARCA:SPY) and PowerShares QQQ Trust (NASDAQ:QQQ).
Let me explain.
Some might be thinking, “what just happened?” following Tuesday’s rude 1.35% decline in the SPY ETF and 2% drop in QQQ to start an abbreviated workweek after four straight weeks of uplifting price behavior from the broader market.
According to the financial mouthpieces, and despite earnings season being upon us, the decline in the SPY and QQQ ETF’s had nothing to do with potential warnings from heavyweights like Microsoft (NASDAQ:MSFT), Apple (NASDAQ:AAPL) or Amazon (NASDAQ:AMZN). Nope. Four letter tickers weren’t the bad guys Tuesday.
Instead, the blame game for the broader market’s weakness was directed at rekindled fears of a global recession following a weaker outlook for economic growth in 2019 courtesy of the International Monetary Fund. But that’s not all.
Reignited trade war worries tied to a Financial Times story didn’t help the SPY ETF or QQQ ETF either. And investors showed some increased irritation following another weekend and the seemingly insurmountable wall dividing Congress and its inability to reach an agreement.
So, what might tomorrow’s headlines read? I’m uncertain, but in reading the price charts the environment looks ripe for shorting the market today.
For all intents and purposes, going long or short the SPY ETF or QQQ is an interchangeable position. The tech-heavy NASDAQ 100 might deliver modestly more price volatility, but the correlation between the two is undeniable, except for maybe an algorithmic high frequency trader. Given the technical stickiness, I’ve chosen to go with the SPY ETF to keep from essentially repeating myself with the NASDAQ 100 and wasting perfectly good ink.
Looking above at the daily chart of SPY, Tuesday’s price action has confirmed an overbought lower-high pivot following the market’s V-bottom pattern, which began almost one month ago. The implications are bearish, at least in the short-term.
The fact that shares have rallied into a price band of fairly staunch-looking resistance adds to the case for establishing a short position in the SPY ETF. The area from about $165.50 to $171.50 contains the 200-day simple moving average, a couple Fibonacci levels, as well as downtrend resistance.
For traders agreeable with today’s bear case, shorting the SPY ETF and using either a stop above Friday’s doji topping candlestick or a looser exit above zone resistance with smaller position sizing, makes sense.
The first target for profit-taking and buying back the SPY would be $155. That’s roughly a 50% retracement from this past month’s rally. It would also be a first smart step toward securing a favorable risk-to-reward ratio for the position. Another reason I’d be willing to begin covering the S&P 500 proxy at $155 is that the last time shares traded at this price level, the market triggered a bullish follow-through day and I suspect there’d be some strong support for the SPY ETF.
The follow-through day is a time-tested pattern widely used by many intermediate-term investors. And on Jan. 4 this market indicator signaled a potential end to December’s short-lived bear. This time could prove different of course and the FTD could simply fail. But given we’re starting off short a well-positioned SPY ETF after an extended rally well-removed from December’s doom and gloom, I’d say things are looking up already for this trader.
Disclosure: Investment accounts under Christopher Tyler’s management do not currently own positions in any securities mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional options-based strategies and related musings, follow Chris on Twitter @Options_CAT and StockTwits.