Market’s Next Move

When guessing what will happen next, you need look no farther then the trend, and the condition of the market.  So what knowledge can be gleaned from the current situation?

This chart shows the SPY, an etf that tracks the S&P 500 index.  We’ve had quite the run since march, but that run seems to have fizzled out.  The 20 day exponential moving average is now moving essentially sideways, with a slightly downwards bias.  This overall shows neutrality in the short term trend - that is, days to weeks.  The 20 day EMA is above the 50 day EMA, indicating that we’re in an intermediate term (weeks to months) uptrend, but the flat 50 day EMA also shows that its not a strong uptrend.  Trend wise, we’re pretty much neutral.  Unlike the march-june timeperiod, we’re no longer in a trending market.

So we’re in a trading market then.  With that in mind, important considerations are support and resistance, and if we’re oversold/overbought at the moment.  There is clear resistance at 95.50, and with today’s rally to 94.15, that is definitely the most important level to have an eye on.  Besides that resistance, there’s also some weaker, less significant support around 93.00.  Far more important then that support level is the one at 87.75, as its been tested many times over the last year, and has held more consistently.  Based on support and resistance levels, the favourable trade seems to be a short @ 94.15. That allows for a tight stop loss, (95.65 means approximately $1.50 at risk), while allowing for strong profits if you aim to close the short at 88 (6.15 profit).  Reward:Risk ratio of 4.10.  Not to shabby.

Condition wise, we’re neither overbought nor oversold at the moment.  Most recently, we were overbought near the last set of highs, but the NYSE BP index has been falling recently, indicating bearishness.

Overall, my current stance is leaning towards bearishness.  The market could go higher, but for traders using tight stop losses, the market is saying to be bearish.  For the momentum players out there, its fairly neutral indicating you shouldn’t be in the market until it has some clear direction.