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This Week’s High Probability Trade

This Week’s High Probability Trade
Simon Maierhofer
March 8, 2011

SAN DIEGO (ETFguide.com)  -  The S&P has been chopping back and forth violently, catching many off guard and whipsawing profits away. But perhaps there’s a pattern to the madness that allows for some profits.

Since its February 18 high at 1,344, the S&P has chopped back and forth with daily candles ranging from 10 to 30 points. Many sharp intraday reversals and false breakouts have made for a treacherous trading environment.

From Irrational to Obvious

However, what looks irrational at first sight makes more sense at a closer second look. The last ten days of trading have produced a defined trading range.

This trading range was outlined last week by the Technical Forecast, a feature of the ETF Profit Strategy Newsletter that focuses primarily on the technical picture. The February 28 Technical Forecast highlighted the importance of the 1,325 and 1,333 levels (both Fibonacci retracement resistances) and the 50-day moving average at 1,296.

Within this defined range, the recommendation was to buy the dips and sell the rallies. Over the past couple of sessions, the S&P has tested the upper and lower end twice without breaking out. The range and the strategy remain intact.

           

Sunday night’s Technical Forecast referred to the Commitment of Traders report, which shows no bias for the S&P 500. For that reason the trading range is likely to continue for this week.

Range Bound

Additional support can be found at 1,303, which marked the high of the September 2008 monthly red candle that resulted in a protracted sell off.

It is interesting to note that the back and forth gyrations might be forming a triangle formation. A perhaps similar triangle (an ascending triangle) was formed in October 2010. On October 3 (at S&P 1,140), the TF stated regarding the forming triangle:

“The S&P has formed an ascending triangle over the past week or two. Structures like this tend to be followed by a breakout to the upside. A measured target for a triangle breakout would be 1,176.”

Of course, today we know that other forces pushed the S&P (SNP: ^GSPC) along with the Dow Jones (DJI: ^DJI), Nasdaq (Nasdaq: ^IXIC), Russell 2000 and most other indexes even higher, but this started with the triangle. Depending on their constellation, triangles can conclude with a spike to the up or downside.

A comprehensive outlook for the month ahead is available in Sunday night’s Technical Forecast. It includes seasonal patterns, triangle projections and alternate support/resistance levels once the market breaks out of its current range.

Tradable Products:

There are plenty of ways to trade the S&P 500. Below are some options listed by long/short and leverage.

1x Long:
S&P 500 SPDR (NYSEArca: SPY)

1x Short:
Short S&P 500 ProShares (NYSEArca: SH)

2x Long:
Ultra S&P 500 ProShares (NYSEArca: SSO)
Rydex 2x S&P 500 (NYSEArca: RSU)

2x Short:
UltraShort S&P 500 ProShares (NYSEArca: SDS)
Rydex Inverse S&P 500 (NYSEArca: RSW)

3x Short:
UltraPro Short S&P 500 ProShares (NYSEArca: SPXU)
Direxion Daily Large Cap Bear 3x Shares (NYSEArca: BGZ) – linked to Russell 1000

3x Long:
UltraPro S&P 500 ProShares (NYSEArca: BGY)
Direxion Large Cap Bull 3x Shares (NYSEArca: BGU) – linked to Russell 1000

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