Spread trading strategies for the S&P 500

Continuing our series of posts on spread trading strategies and stocks, today we focus again on the S&P 500, which has continued to rally higher from support at 1003.1, making a counter trend move.

Last night’s close at 1067 was just below resistance and at the time of writing this morning the market is still holding just below that level. When the US markets get going this afternoon we will likely see a test of resistance early in the session especially due to the proximity of the market currently to the resistance levels. The market’s reaction at that level will likely set the tone for today’s action.

We mentioned previously that there may be support at around the psychological 1000 level and this did appear on Wednesday and the S&P 500 has been moving higher since. What has surprised many is the strength of the rally this week. As of last night the S&P 500 is already up by 5.2% for the week and if resistance is cleared that may be considerably more by the end of today’s session. A close above 1080 would give a bullish engulfing pattern on the weekly chart and this would point to further upside action next week.

As we have said many times before, the biggest up moves come in bear markets and this is in my opinion a bear market and the rally this week is a bear market rally. However, the strength that this rally has shown may well take it through resistance around the 1070 area and if the market closes above that level then we may see a continuation rally in to next week.

If that scenario does play out then this rally may continue up towards the previous high formed on the 21st June at 1129.3, at which level we would expect major resistance and the long term downtrend may resume from that level if indeed the market even gets that high.

Our proprietary indicators at LS Trader still indicate that the long term trend is down and that we are still looking for a big move lower at some point this year and almost certainly before year end. It must be remembered that the lows of this market continue to be lower than each previous move and the rallies are also stalling at lower levels, so we have the classic bear market set up of lower highs and lower lows and in the long run this points to lower levels for this and the other stock markets.

With that in mind, it is a fairly dangerous game to trade against the trend, which is still down and the risk/reward for long trades at this time is not favorable. When deciding which spread trading strategies to implement in the markets it is always wise to consider strategies and positions that go in the direction of the long term trend as the odds of success increase when one does so.

If one is not already short this market then it is probably better to wait for new confirmation to the downside before initiating any new positions in this market as this bear market rally may yet continue higher. Moves against the long term trend are usually fairly short lived until or unless we get a long term change of trend and this is way off. For me the market would have to clear the May highs around 1210 before that change of long term trend would be confirmed and any long trades should be considered.

Good trading

Phil Seaton


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