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:

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.