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June 22, 2009

Start Your Engines

Trading is a lot more fun when the market does what you expect! The S&P 500 dove 3%, breaking out of the bear flag which formed into the end of last week. The index is now within 13 handles of its 65DMA, and we're starting to see the makings of the head and shoulders pattern I hypothethized a couple weeks ago.

s&p 500 graph

The game plan all along has been to play a moderate short line down to the 65DMA and see how price reacted to the encounter. Given the confluence of the 65DMA with an important pivot level at SPX 880, there a high probablity of tagging that level with the next two sessions. I will lighten my shorts at that time and wait. The 65DMA frequently rejects price, and I'd like to see if the bulls have one more squeeze left in them. If the SPX can manage a close beneath the 65DMA, then the likelihood of a grander decline will increase, shall we say, preciptously. At that time, I would like to push my short bets on a larger scale.

Oil also broke lower by about 4%. I noted weeks ago that the SPX probably wouldn't top out until oil did the same, yet I poured dough into the short hole while expressing expectations that crude would reach the low $70s. Sheesh. Anyway, the break seems to on in earnest for the black stuff, which lends weight to the probability of seeing the aforementioned 65DMA break. Still, I wouldn't put it past market makers to gun the shorts in oil one more time either.

Being short stocks and crude did not make it any easier to watch mining shares getting tagged. The gap lower on the open prevented me from writing my covered calls.

gold miners chart

I doubt we'll go straight to $27, though. Action in the 5-day RSI hints that a back-test of the overhead pivot may be in order, so perhaps I'll get another chance to do some call writing.

I'll conclude tonight with a quick look at natural gas:

natural gas prices

The back-test offers a long entry with a close stop trigger.

The next several days are going to be tremendously more meaningful than the head shave action we saw during the first have of the month. Stay tuned...


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