Trading plan for May 14, 2012
Weekly Outlook - S&P 500 Cash Index (SPX)
The S&P 500 cash index (SPX) closed at 1369.10 on Friday, down 15.71 points for a net weekly loss of 1.1%.
Last week was full of bitter news on the street. First, the French President lost the election. Second, Greek voters managed to choose a kind of un-government – a lot of splinter parties but no real leadership. Both brought lots of uncertainty about economy recovery to the equity market. And at the end of the week JPM admitted it had lost at least $2 billion on a “hedging” trade and looked like they were not quite sure how the their whole “hedging” thing works. It all made investors nervous.
This week is expiration week for May options. A combination of chop and shakeout movement may occur before the market moves into the June option next week. SPX is not far from its major support zone. We may see a short-term low around 1325-16 area kicking in this week.
SPX Weekly Chart
Technical Analysis
Based on the weekly chart (above), SPX had a continuation low week and challenged the March month support at 1340 level. The price only bounced 3 points from it.
Based on the pattern, there is a potential inverted H&S pattern, which is bullish. The right shoulder low could be around 1316-1312 area, which overlaps our second major momentum support line (40EMA weekly). As soon as SPX gets to that area, we are likely to see a bounce from it.
Second, based on price action, SPX broke April’s low, which created a 3PB pattern, (3rd Price breakdown) – a bearish pattern in the short-term. It indicates SPX still has some room to go down toward the 1316 area.
Based on Wave principles, SPX is still in sub-wave 4 of wave iii of main wave 5 (so far). Sub-wave 4 is correction wave. It could develop into a full correction wave iv movement if SPX breaks 1306 level and pushes down to the full measurement area at 1288-1285.
The intermediate-term momentum indicators remain neutral, and long term indicators still have a negative divergence. Both hint that SPX could go lower from the current price. But due to short-term oversold condition, price could have a bounce up to 1385 area for testing.
There are other things we also need to pay attention to:
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The CBOE market volatility index hit 21.59 last week – a potential double top area with the month of April high. The index could move up further to around the 23.50-24.00 area to create some panic moves, which would help SPX get to its major support area, where a bounce is likely.
- AAII report shows the bearish sentiment hit 42.6%, which is the highest number since Sept, 2011.
- Put/call ratio shows the highest level since Oct, 2011.
All of these are favorable to the bull side. If we see improvement from European headlines, short-covering could add fuel to a potential SPX bounce.
Monthly resistance 1450 and support 1325; Weekly resistance 1395 and support 1320
Daily Outlook - S&P 500 e-mini Futures (ES)
ESM2 Daily Chart
ES pulled back into the range between April low 1352.50 and the March low 1335.25. Last week ES made a 1339.25 low, but managed to push price back up to 1350 line for closing.
So far ES is handling the bad news and Monthly lows fairly well. Price was chopping around 1350 line for a week and tried to form a new support. Today we may see a wide swing on both sides, due to last Friday’s closing at 1350. After the weekly option expiration, we may see the price run both down and up.
Short term has oversold condition, but intermediate-term just has a neutral condition. The consolidation range 1363-1340 will be a key level to watch. We may see ES move up to 1375 area to test the sell signal. If there is any chance for ES to move above 1384 level, a short squeeze could be seen. Conversely. a break below 1330 will be bearish. A further dip into 1320-1312 range is then likely.
Members, download the file to see the weekly outlook for gold, oil, bonds and the Euro, as well as the detailed ES trading strategy for Monday.
Date Added: 2012-05-13 15:04:58
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Tomorrow's Outlook 