S&P 500: July 2013 High Probability Entry Points

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.

(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.

Downtrend in SPY Through Year End - July 2013

Intermediate Downtrend in SPY Could Last into 2014

The chart above shows the bull market in the SPY beginning March 2009. By looking at the Elliot Wave counts in the context of the long term trend channel, traders can develop a "feeling" for the maturity of the trends in play. 

Brief Elliot Wave Overview

A quick breakdown of how Elliott waves work should help to clarify the concepts contained in this analysis. The Elliott wave principle states that, in a bull market, markets rise in a series of 5 waves up, followed by three waves down. These five waves up and three waves down combine to make up larger waves which follow the same pattern (5 up, 3 down).

Long Term Trend Analysis

With that in mind, we take up the analysis of SPY beginning with the intermediate uptrend which began in November 2011 and ended in May 2013 (starting at blue wave 2 and ending at blue wave 3). During this time period, SPY rose from below $110 to nearly $170 in a series of 5 up waves (labeled in yellow).The top of this intermediate rally reached the upper boundary the trend channel. The last time prices reached the top of the trend channel on a 5 wave count was in April 2011 (at blue wave 1). The decline that followed formed three minor down waves over the next 7 months (purple waves a, b, and c) and took prices to the bottom of the trend channel.

Current Downtrend is "Intermediate" in Significance

Because we have reached the end of the third intermediate wave of the bull market (blue wave 3), we have reason to believe the downtrend which began on May 22 will be on intemediate significance. The probable range for this decline is illustrated by the light purple triangle.

Profit Targets

Support at $153 is the first, and most conservative, downside target on the weekly chart. It intersects the lower boundary of the uptrend channel in February 2014. Below $153, a more aggressive target for support lies between $146.25 - $148.75 and intersects the uptrend line in October/November 2013.

Looking for Short Entry Points

The decline from $169.07 on May 22 to $155.73 on June 24 (purple a) appears to be the first wave of a three wave downtrend. Traders should refer to the daily chart beginning November and the hourly chart beginning May 22 in order to identify prices at which to sell short.

Summary of Overhead Resistance

I've got my eye on four resistance levels to use as potential short entry points. 

• $161.25
• From June 4 and 5 lows
• $162.25
• From 50 and 20 day moving average and May 9 low
• $163
• From the hourly chart. See below.
• $164
• From the minor downtrend drawn across the May 22 and June 18 tops.

Prices are currently testing resistance from June 4 and 5 around $161.25. 

The next resistance lies at $162.25, where the 50 and 20 day moving average overlap with the low from May 9. Given the coincidence of the 50 and 20 day moving averages with resistance at $162.25, this is the most likely reversal point.

The last resistance before I will re-evaluate my bearish bias lies at the downtrend line drawn across the May 22 and June 18 tops. SPY could rise as high as $164 over the next week without breaking the minor downtrend.

Traders are encouraged to watch price action at these price levels closely for signs of weakness, i.e., large volume reversals and false breakouts. 

The daily and hourly charts below illustrate overhead resistance.

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. Stockmarketmonk.blogspot.com nor the owner can be held responsible for any losses (or gains) incurred from information provided within the website.