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The End of the Rally? S&P Reverses Course at 50% Retracement

by Brett on June 21, 2010

Stocks gapped higher at the opening bell this morning on news that China would (slowly) allow the Yuan to float.  The “Renminbi Rally” was to be short lived, however.  The S&P briefly stuck its nose above the 1130 mark, and quickly reversed skate to finish the day in the red.  Volume was anemic, once again.S&P 500 Stock Price Chart June 21 2010Is the S&P’s mini-retracement over at the 50% mark?

Source: Stockcharts.com

When this rally kicked off in late May, we thought the S&P would likely rally as high as 1123…though we held out hope that our friend Jeff Clark was correct in predicting an 1130 ending point.  On May 27th, Jeff wrote:

Over the next several days, the S&P 500 could rally back up to 1,100 or even 1,130 if the bulls really take control.

Remember, though, dead cats always fall back to the bottom. Once we get a bounce in stock prices, we’re likely to come back down and retest the lows.

As a trader, I’m playing stocks from the long side right now. But I’ll be quick to take profits and I’ll be looking to short stocks aggressively if the S&P rallies back toward 1,130.

After being forced to cover my previous ill-advised short at a loss, I again shorted the S&P during this morning’s bounce (@ 1119.50 via Sept S&P mini-futures).

So far so good on this one – I LOVE this as a potential short entry point.  Though this rally took awhile to get started, it eventually carried out in a fashion pretty well aligned with our original playbook.

The weak volume numbers on the rise add to my confidence that the next turn should be down.  We’ll need to see price, and preferably price AND volume action, to confirm that the downtrend has resumed.  But all indications show we could be on the cusp of a significant reversal.


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More on this topic (What's this?)
Economist Gary Shilling: S&P 500 will drop 43% this year? (Value Investing, 4/11/12)
Sell in May and Go Away? No Way! (Wall Street Daily, 5/10/12)
Is This Bull Market Over? (Investment U, 4/16/12)
Read more on S&P 500 (SPX) at Wikinvest

Tagged as: SDS, short term trading advice, Shorting the S&P 500, shorting the stock market, stock market timing, stock market update June 21 2010, Technical Analysis

  • Mike

    I also have been sitting in pain in my short position till today. Are you holding your short or are you going to cover ? Instead of shorting the index itself, I am short a lot of the airlines which are down over 2-3% all over the place.

    Between every single exogenous event out there that can go wrong for them, potential hurricane disruptions, energy prices, decreased consumer demand, I saw that as an idea short set up and as a hedge against a pullback. There’s always a lot that can go wrong for the airlines industry, and not a lot that can go right. They were also ‘pumping’ the industry on CNBC.

    Unfortunately, I think we get to 900-1,000 in the S&P-500 as a ‘bottom’. The 1,040-1,050 has been a teaser so far.

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  • Brett

    Actually I got forced out of my short over the weekend when my futures contract expired. But I did pick up another one – a September contract – yesterday morning. I got hammered on the cover (I had shorted at 1049, covered at 1119), but am doing much better on this second short, which I got at 1119 (current Sept contract is down to 1092).

    Yes great point on the airlines – no matter what happens, they are probably not going to do well.

    I agree, I think we blow past the 1040-1050 support on the way to much lower levels, maybe real soon.

  • Pingback: Shorting the S&P 500 on June 29, 2010 via S&P Futures, SDS — The Contrary Investing Report

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