Trading plan for Jan. 5, 2015

Weekly outlook – S&P 500 cash index (SPX)

The S&P 500 cash index ($SPX) closed at 2058.20 last Friday, down 30.55 points for a net weekly loss of 1.46%. But it gained 11.39% for the year 2014, which was almost double the 6% consensus prediction from Wall Street analysts.

Last week was a short holiday week. But it was quite interesting. The last day of 2014 and the first trading day of 2015 both turned out to be profit taking opportunities. The selling may continue this week, which will be crucial in setting the tone for the start of 2015. The main focus will be on the non-farm payroll report on Friday morning. We expect volatile price swings to continue.

Technical analysis

1. Long-term

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SPX monthly chart

During the holiday season the ES attempted to break out from the neckline of the inverted Head and Shoulder pattern with thin volume. But the cheerful and optimistic tone disappeared on the last day.

The end-of-year re-balancing on the S&P 500 and profit-taking sent the market back down below the level where it was trading when the big boys left for the holidays. The retracement wiped out all of the December gains and stopped on Friday at the middle of November’s trading range.

But that is short-term behavior. We still believe the long-term uptrend is intact and strong. See the annual Review posted Dec. 31 for our long-term upside targets and major long-term support. As long as the S&P 500 doesn’t breach our major long-term support around 1640, we will stick with all our upside targets.

One thing we want to emphasize is the likelihood of higher volatility this year. We expect the daily, weekly and monthly ranges will be larger than last year and some months are likely to see more volatile moves. Traders need to prepare careful plans and watch for rough weather.

2. Short-term

Before the Christmas holiday, the $SPX index closed at 2070.60 on Dec 19. At that point it already had an overbought condition. During the two holiday weeks there were not many traders around, and many big institutions also cut back on their market activities. The result: the price went up, but the volume was thin. The market is vulnerable, and we should expect some adjustments before it continues the rally.

The first week of 2015 will be crucial in establishing a short-term and intermediate-term stance. Much depends on how strong the current pullback will be. The first major support line will be the 1970-65 zone, extending up to the 2000 psychology support line.

We want to wait and see how well those two support lines hold before we provide estimated price targets. An early correction will prove attractive for institutional investors, and may provide support for one more great Bull year.

Daily outlook – S&P 500 mini futures (ES)

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ESH5 Daily chart

In the first trading day of the New Year ES was strong up in the early sessions but faded quickly after the market opened. That left a hole between 2081-2086 and this unfilled gap could take a while before it is revisited again.

Monday will be the key day for the rest of week. ES could go sideways within last Friday’s range first. Later, a break above 2070.50 could push the price up to 2080-85 zone to attempt filling that unfilled gap. A failure to break out upside, but instead moving below 2035, will be bearish, and a further decline toward 2020-18 or lower should then be expected.

The 40-day moving average will be a key line for Monday.

If there is a bounce up near the neckline of the H&S pattern (1970-75) our traders should look for a short-side entry to fade the price move the first time ES visits that level.

On the downside, we should watch for a momentum breakout movement below 2038-35.50. If the momentum is strong, buyers should stand aside until the strength runs out. Don’t try to jump in front of a high-speed train or catch a falling knife.

The major support levels:
2039-35.50, 2025.50 – 26.75, 2010-08, 1990-88, 1975-72
the major resistance levels:
2069.25 to 74.75, 2078.75 to 81.00, 2085.50 to 89.00

To see the full trading plan with the buy/sell numbers and the important events for the week, download this file: 150105-plan