The hourly chart above shows the decline in the SPY since May 22. As of Friday, June 28 close, prices sit in the middle of a minor downtrend channel, derived from the downtrend line drawn across the May 22 and June 18 tops.
In my analysis of the weekly chart of SPY I call for a decline in the third quarter and possibly into 2014 (SPY Down Through Year End). The purpose of this analysis will be to pinpoint high probability entry points to take advantage of the long term forecast.
Two Day Trading Range
On Thursday and Friday June 27 and 28 prices settled into a $2 range between $160 and $162, exactly in the middle of the trend channel. Traders should be cautious to enter trades here as probabilities of a break in either direction are about equal. Waiting for high probability entry points that allow traders to place tight stops is critical to ensuring long term profitability.
Defining the Possibilities
The yellow (long) and purple triangles (short) highlight favorable risk/reward entry points for the month of July. In the next week it is difficult to say, with any certainty, in which direction prices will break out of the $ 160 to $162 range. Momentum from the short term up wave beginning June 24 suggest prices could reach the upper boundary of the trend channel sooner rather than later, while the distribution patterns on the daily and weekly charts suggest further declines. It is also possible to see prices continue to move sideways within the range only reaching a target entry zone at the end of July.
Trading at the Boundaries
However the push and pull of prices plays out over the next week to month, traders are advised to wait for prices to test the boundaries of the trend channel before entering positions. There are infinite possibilities how the drama could unfold, here are two for fun:
(1) Prices continue higher in the next or two week (on continued weak volume) and test the downtrend line and resistance around $164 and we get short with a stop $2 above our entry price. Prices drift in between $164 and $162 for a couple weeks, but never trigger our stop and at the end of June have fallen to $160. In the first week of August we see a quick rally on light volume to $162 before prices dive below $160.
Read (SPY Down Through Year End) for my major trend analysis.
Read (SPY Down Through Year End) for my major trend analysis.
(2) Prices decline within the next 2 weeks to test the lower boundary around $158. But by the end of June have risen as high as $163 and are testing the May 22 to June 18 downtrend line and 50 day moving average. We get short as close to $163 as possible with a stop $2 above our entry price and sit through a 2 - 3 weeks where prices bounce between $158 and $162 but again not triggering our stop. Prices break below $158 at the end of August. Will $155 hold? $153?
The important part of these scenarios are that the positions were opened within $1 of the extremes of the trend channel, it is for this reason alone that our stops are not triggered.
Disclaimer: The analysis above is for educational purposes only and is not investment advice. Trading involves risk and investors should conduct a thorough analysis of their financial situation before undertaking any market operations. Neither StockMarketMonk.blogspot.com or the author can be held responsible for any losses (or gains) incurred from information provided within the website.
The important part of these scenarios are that the positions were opened within $1 of the extremes of the trend channel, it is for this reason alone that our stops are not triggered.
Disclaimer: The analysis above is for educational purposes only and is not investment advice. Trading involves risk and investors should conduct a thorough analysis of their financial situation before undertaking any market operations. Neither StockMarketMonk.blogspot.com or the author can be held responsible for any losses (or gains) incurred from information provided within the website.
