We wrote in our weekly update to LS Trader subscribers last Sunday that although the S&P 500 had broken out of the lateral trading range to the upside that the subsequent price action since then had not been convincing and that we therefore did not have a buy signal yet. We also wrote that although the price has closed above the prior resistance, the last 3 sessions have been of a doji pattern, which indicates that the market is tired and this is coming at a resistance level around the 1120 area.
On Monday the S&P 500 moved higher, briefly clearing the 1120 resistance level posting a high for the day of 1129.2 (September contract) but was unable to hold there and closed back down at 1110.6. This in a way confirmed the tiredness and resistance that we had seen in this market from the prior 3 sessions. Although the long term trend remained up and still is, this does not bode well for the short term.
The S&P 500 continued with short term weakness for the next 3 days, closing last night at 1070.5, which is already down 3.58% for the week. There is some support around this 1070 area so this level will bear watching closely today. A move below 1070, especially on a close tonight would be very bearish and would bring the lows at 1034.8 right back in to play.
We have mentioned previously the importance of the 1034.8 level as it represents a few key things:
- A break at this level would change the long term trend to down according to our proprietary indicators that we use at LS Trader.
- This level is same level of the lows of the previous sell off on February 5th.
- There is a hammer pattern from which the rally began from the lows on the 5th and this hammer pattern is a bullish reversal pattern and provides support to the market until we get a close below the low of the hammer.
- A move below this level would also be new contract lows and new lows for this year.
In addition, there is also the possibility of a very large head and shoulders top pattern forming on the S&P 500, with the neckline at, yes, you guessed it, 1034.8! This would be a very large head and shoulders pattern and if the neckline was broken then the distance from the head to the neckline would be subtracted from the neckline to give us a downside target of around 860! It must be said that this would be a highly bearish target and that also these patterns have a tendency not to work out, especially when they are so obvious and so many people will see them.
However, this does fall in line with our longer term view at LS Trader on the stock markets and we are bearish overall and expect lower prices in the stock markets later this year and for prices to be significantly lower at some point during the next 12 months. It should be noted that on a seasonal basis we are moving in to the weakest time of the year, with September on average the weakest month of the year.
From a spread betting perspective a move of this magnitude would be very profitable. One of the great advantages of spread betting is the ability to be able to spread bet markets such as the S&P 500 without needing anywhere near as much trading capital as would be required if one was going to trade the actual futures contract, which is way beyond most people.
Most spread betting platforms will offer prices on the S&P 500 from around £10 per index point. In our example above then, even at minimum size of £10 per point, the potential profit from this move would be £10 x 175 = £1750. If one was to use around a 50 point stop which is reasonable on the S&P 500 in the current volatile trading conditions this would represent a risk reward of 3.5. This would also be tax free for UK Residents and financial spread betting is currently tax free in the UK.
Until next time, good luck with your spread betting
PS. To find out more about the LS Trader financial spread betting system and our proprietary trading methods please click here.