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Welcome all Safety in the Market traders to this month’s dedicated newsletter. Since I wrote to you last month several Australian stocks managed to continue to rally and break their June high’s. While the overall market (the Index) has not managed to take out the 21 June high. If you take a look at the chart of the SPI200 (AAI-SpotV) on ProfitSource you will see just what I mean here. This month I’m going to share with you a set-up I’m watching and trading in the U.S. markets on their biggest stock index, the S&P500. In particular we will be looking at the chart of the ‘E-mini S&P500’, which is the highest volume stock index contract in the world. The physical S&P500 index is made up of the top 500 stocks in the U.S. The E-mini allows you trade movements in the underlying index using futures contracts.
Just in case you weren’t aware, the stock market had a very big fall between late 2007 and early 2009! Since March 2009 the rally that we have seen in the stock market still needs to be viewed in the context of a retracement into the bear market range. Chart 1 has the most basic ‘Range Resistance Card’ that you would put together for the bear range, simply showing the 50% retracement level.
Chart 1 – E-mini S&P500 Daily Chart since 2007 – 50% Retracement Level
click chart to enlarge
The bear market range runs from 1,586.75 (11 October 2007) to 665.75 (6 March 2009) giving us a range of 921 points. The 50% retracement level for this range is 665.75 + 921/2 = 1,126.25. While the top in April 2010 is well above this level, the market has retreated back below this 50% level and is now bumping its’ head up against our 50%. You will see by looking closer that I’ve labelled the most recent two tops, 1 and 2. Chart 2 zooms in closer to the recent market action and these tops.
Chart 2 – E-mini Bear Market Double Top Close Up
click chart to enlarge
The two tops in question are 1129.5 (21 June 2010) and 1127.75 (5 August 2010). It is very early days to call this set-up a double top, but it does have the potential. Now I have referred to this set-up as a ‘bear market’ double top. What we have here is double top where the low between the two highs (6 July) in this case) is lower than the low preceding the first of the tops (25 May). Here we have equal tops and a lower bottom. Subtly we can also note that at present the second of the tops (5 August) is just slightly lower than the first.
The safest ways to trade a set-up like this, where we have more than a month between the double tops, is to wait for a ‘first lower’ swing top trade. This set-up is a little beyond pure Smarter Starter Pack, but well within the realms of the Number One Trading Plan theory and our Interactive Trading Workshop content. Many of our most successful Super Traders are experts on this E-mini S&P500. The data for this contract along with all other major futures contract data is available through ProfitSource.
It’s been a challenging few weeks in the market if you hold an overall bearish point of view and one where less trading has meant more. There are quite a number of things I could discuss with regards to time and price on this set-up. I’m sure many of our graduate Platinum students will be busily doing that right after they finished reading this now. Next month we may get time to review the outcome here. For now I’m happy to share with you a set-up that I’m stalking very closely.
Until next month...
Noel Campbell
Professional Derivatives Trader
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