There are many spread trading strategies that can be used for spread trading stocks and commodities such as the S&P 500 and gold and we have been looking at both of these markets in a fair amount of depth over the past few weeks on this blog.
Let’s start with the S&P 500 today and we will look at Gold later in the week. Firstly, the S&P 500 had a long term change of trend to down last week according to our proprietary trend indicators at LS Trader when it broke through the major support level at 1034.8 before reaching new lows for this year at 1006.5. We have been writing for several weeks at LS Trader that we were expecting the stock markets to break lower and move lower again between now and the end of this year. It remains to be seen if this is the time for that move lower.
Last week we wrote that we were looking for a test of 1000 support, which is a major psychological round number and that we may initially get a bounce higher. Yesterday morning in early trading we saw new lows at 1003.1 (September contract) before a major rally all the way back up to highs for the day at 1038.3, at which level the market stalled and sold off again. Yesterday was clearly then a day of indecision as many bargain hunters initially entered the market and then common sense prevailed later in the session.
In the long run, success in spread trading comes from implementing spread trading strategies that have been proven to work over time. In the S&P 500 scenario that we currently have it is best overall to follow the trend and not try to fight it. If the market fails at 1000 support there is a lot of room to the downside, but if the market rallies then it is best to admit that the trade was wrong and take a small loss. In this way a favourable risk/reward trade is in play, which makes good profit if it is correct but only loses a relatively small amount if it is wrong. If this spread trading strategy is employed consistently over time then the odds are stacked in the favour of success.