Continuing on from our post last week on spread betting stocks where we talked about the current lateral trading ranges that the stock markets are in and in particular the S&P 500 (the real stock market), today we look at what has been happening in the S&P 500 and what may happen next. There are a number of technical factors in play in this market which may have a considerable bearing on where the markets go next and this information should assist you in making your decisions as to how you are going to be spread betting stocks and in particular the S&P 500 over the coming days.
In the S&P 500 (September contract), the trading range is still between 1034.80 and 1100. This range has now held good for the last 17 sessions and has not been outside of it since the 19th May on the basis of closing prices.
Over the past few sessions we have seen a rise from support up towards the top of the range at 1100 (the intra day high yesterday was 1101.5 but the market failed to close above that level). From the highs of the day yesterday, which were right on the resistance that we have been talking about in recent posts, sellers returned and we got a shooting star pattern confirming resistance. For those not familiar with shooting stars they are a bearish candlestick pattern and more relevant when they confirm a recent resistance level as they have in this case. This shooting star will be valid until the market closes above the high of the shooting star at 1101.5.
As we have said before there have been a few attempted rallies which have taken the market up towards the top of the range, only for the market to reverse and go back to the bottom of the range where buyers have each time come in. This has lead to the sideways action. The longer that this sideways action continues the larger the eventual breakout is likely to be.
Just to clarify, as some commentators are erroneously stating that we have a double bottom on the S&P 500 that that is not the case. For a double bottom to be confirmed the high between the 2 lows has to be taken out and as yet this has not happened. If the market closes above the high between the 2 lows then this will also be bullish.
Therefore, the levels to watch are still 1034.8 to the downside and 1101.5 to the upside. When we have a lateral range like this we can use the height of the range and add it to the breakout level to give us an indication of how far the initial breakout is likely to go. In this instance the range is around 65 points, so we can set upside targets to around 1165 and downside targets to around the 970 area, although there are other support and resistance levels that may come in to play prior to those targets should we eventually get a breakout. It’s wise to wait for a breakout confirmation before making any spread betting decisions.
As we wrote in our last post on spread betting the S&P 500 of the 2 breakout levels the more critical level is the bottom of the range at 1034.80. A break here would change the long term trend to down, aligning the short and long term trends and likely giving rise to more selling. To add to the significance of this level the lows here are at the same level of the lows of the previous sell off on February 5th, where we had a hammer pattern from which the rally began. A hammer pattern is a bullish reversal pattern and is the opposite of the shooting star, which is the bearish reversal pattern formed yesterday.
Therefore, a close below the February 5th lows will negate the hammer pattern and also give a long term trend change to down whereas a breakout above 1101.5 will negate the shooting star and give a bullish breakout. Since the market is closer to the top of the range and the long term trend is still up for US stock indexes, the odds slightly favour an upside breakout but we’ll have to wait and see what happens.
The LS Trader financial spread betting system does not initiate trades on reversals as it is a trend following system, but instead goes for momentum plays on breakouts in the direction of the trend and sits on the sidelines through lateral trading ranges.