Spread trading strategies for week commencing 19th July 2010

Today we have another post of spread trading strategies for the coming week, with our focus again on the S&P 500 and Gold. Gold seems to be the ever-popular market and the S&P 500 is the real stock market, so is as good a place as any for our attention.

Last week we wrote that the S&P 500 had been pushing up towards resistance at the 200 day moving average, which was also in the area of another round number, the 1100 area, but that the market was running out of steam at that level. On Wednesday we had a spinning top, Thursday was a northern doji and Friday was a long red candle.

The spinning top and northern doji are not reversal patterns but show that the market is struggling to push higher and has lost momentum. When this happens at a resistance level, which it is in this case, that adds to the bearish scenario. From there we still however need price confirmation to the downside and we got that in the form of the long red candle on Friday, which was a 2.5% down day.

If we look at the candles from Tuesday onwards we have a long green candle, 2 dojis and a long red candle. Although this does not technically make it an evening star pattern, I view it as such as the addition of the extra candle does not alter the market psychology at these levels. This pattern shows a shift back to bearishness in this market again, which is in the direction of the long term trend, down.

We wrote last week that we viewed the recent rally as a bear market rally and that more importantly we were in a classic bear market set up with a series of lower highs and lower lows. Last week’s highs look like yet another lower high in this market so we should now see another lower low, which would take out support at 1000 and give new lows for the year and will likely put a 9 handle on the price with the first sub 1000 target at 980.

The odds therefore favour a continuation lower to test 1000 support again and this market must be considered bearish below what I call resistance 1 at 1100 and resistance 2 at 1129. As we wrote last week, the short term remains bearish as long as the market stays below 1129 but a move above that would change the intermediate trend. Therefore, only short spread trading strategies should be considered here unless 1129 gets taken out to the upside.

Now let’s take another look at Gold. Last week we wrote that $1215 was looking like a key level in this market and that we were looking for a close above this level or a move back towards support at $1185 may follow. Gold cleared $1215 intra day but did not close above it and this led to a move back down to almost exactly $1185, with lows for the week at $1185.8.

We are therefore almost exactly at support 1 in this market and a breach of support here may bring $1170 in to play. For now the long term trend is still up as there has yet to be anywhere near enough weakness in this market for a long term change of trend to down. Our proprietary trend indicators at LS Trader show that the trend is down for the S&P 500 and stock indexes but still up for Gold.

Good trading

Phil Seaton


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