Support Holds at 1040 for the S&P…The Other Way, This Time

Support Holds at 1040 for the S&P…The Other Way, This Time

Last week, the S&P 500 collapsed through it’s 1040 support line, which had been tested twice before, indicating that there might be major PAIN ahead for stocks.

This morning, stocks opened UP – but found resistance once again at 1040…this time, to the ceiling side.

Before the weekend holiday, Todd Harrison of Minyanville presciently mused in his column:

If we get a bungee to S&P 1040 at a point, please remind yourself that a retest of a breakdown is traditionally when you’re supposed to initiate short-side risk (just as a retest of a breakout is when you’re supposed to initiate upside risk).

This morning, we indeed got a bungee to S&P 1040, only to see the S&P drop all the way into negative territory on the day…before rallying late to finish up 5 points.

S&P 1040 Support July 6 2010Source: StockCharts.com

How are we playing this?  This morning I covered my E-Mini S&P short…after netting 100 point drop in just two weeks, I felt that we were/are due for a bounce of sorts.  So I closed the September E-Mini contract at 1026.50, for a very nice gain:

S&P E-Mini Short Position September 2010

But isn’t this counter to my “lesson learned” from my last ill fated S&P short – that being, in a bear market, you should just “get short and stay short.”  Yes, it is counter – so perhaps in this case, you should do as I say, and not as I do.

(Side note: I think this is why “paper trading” is absolutely worthless.  Unless you have real money on the line, you can’t gauge how you’ll act when the chips are down.  People do crazy things when facing large gains and/or losses.)

Well what now?  Honestly I hate not being short this market.  Shame on me for covering.  But it can be a healthy exercise to essentially “start from zero.”  Which allows me to ask with a clear head: would I short this market right now?

The answer, I believe, is no – not right here, at least.  1040 would be a very interesting place to reinitiate this position.  By placing a stop just above and “out of the noise”, that could be a very attractive risk/reward combination.  Of course the “out of the noise” part would be important, as you can be sure others have a similar trade idea.

But I can’t justify a reinitiation of the short position right here at the 1028 mark.  After two straight weeks of trading down, it feels like this bounce should last a little longer to reinvigorate optimism.

Though the counterpoint to waiting for a bounce would be the fact that in bear markets, the worst losses are typically incurred after markets are already oversold.  We are currently oversold – which may mean the true carnage is about to ensue.  Ah, if only our crystal ball was working 🙂

Bottom line: Shorting the S&P at 1119, the top of the last rally, was a compelling play.  At this juncture, I don’t see an obvious play either way.  A rally back to 1040, and another failed retest of that mark, would incline us to “short the hell” out of this market.  But for now, we’ll sit tight.

  • Brett,

    I have been following your blog (including your commodities blog) and your Seeking Alpha articles for a while. I like the way that you think about the markets. You have a high level view of political economy and a low level understanding of how markets move. However, it seems that you are unable to combine the two into a consistently profitable trading strategy. I believe that there are two areas you should think about. The first is that you are trading too big. For the money that you have available to risk in the markets, you should not be trading futures. Stocks, specifically ETFs, would be a better trading vehicle. Secondly, it seems that you crave the action of swing trading but your analytical skills appear to be more suited to longer term trading. For example, you believe that the SP500 could soon be off to the races on the down side but are concerned about a short term rally. If you trade SPY instead of the emini, it is much easier to withstand a rally.

    These are just some friendly suggestions. I would hate to see you blow out your account, which might prompt you to stop blogging.

  • Brett

    Thanks for the comment and suggestions, and actually the action I am tracking here is just in my “speculative” short term futures account. My longer term positions are mostly cash, with a few ETFs (SDS) sprinked in. But that’s not as entertaining as gunslinging futures, so this is the account I mostly blog about, even though it makes up a much smaller part of my overall portfolio.

    This account has indeed been run way up ($2K to north of $100K), and then very nearly blown out due to wreckless trading, but now sits at $15K with an additional $20K removed previously to fund my software startup. But I’d agree and say this is for entertainment and informational reading purposes only!

  • Pingback: Shorting the S&P 500 via Futures, SDS on July 13, 2010 — The Contrary Investing Report()

About Author

Brett

Hi, I’m Brett Owens – and I’m a financial junkie. My “problem” started incollege, when I got a little dose of the stock market – man, was I hooked…in no time, I was reading the Wall Street Journal religously.

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