S &;P 500 – Potential Reversal Set Up


  • If the S&P 500 makes a short term trend peak between about 1255 and 1270 there is a decent chance it will be the end of the major upswing that began in July
  • The VIX index is down in the “complacent zone” increasing the likelihood of a sharp sell off in response to any bad news that comes our way
  • If a peak is made in this zone, the set up could be traded by shorting the index on the first close below the candle that makes the peak
  • An initial stop could be placed just behind the peak
  • An initial profit objective would be a 50% retracement of the whole rally from July.

The S&P 500 has made a 5 swing ( or wave) advance since July.  When a 5 swing advance is completed there is a good chance of a large correction of the whole advance occurring

A 5 swing advance should comply with the following conditions:

  • The corrective low at 2 should not move below 0
  • The 3rd swing ( i.e. the move from 2 to 3) should not be the shortest of the 3 swings up.
  • The low at 4 should not overlap 1 (i.e. it should not move below 1)

As you can see from the chart, the rally from July in the S&P 500 ticks all these boxes

In these circumstances, Fibonacci projections can be used to identify levels that may represent the end of the 5th swing. This technique positions the trader to enter at an attractive risk reward point. If the projection doesn’t work, you can place the stop just behind the peak for a small loss but if it does work you have entered very close to what has a good chance of being the beginning a significant downtrend

The chart shows 2 Fibonacci clusters. The first one is where the market is now. This assumes that Swing 5 which begins at point 4 will be 38.2% of the distance from 0-3 and 161.8% of the distance from 3 back to 4.

If price does not make a peak at this level there is a second cluster and opportunity for this strategy up at around 1310. This involves 61.8% of 0-3 measured from 4 and 261.8% of 3-4 measured form 4

It’s best not to look at these clusters as resistance levels. They are not predictions that the market will stop at these levels. They involve an increased chance that if the market does stop at the cluster then a signifcant down swing will follow

The VIX index shown below is an index of volatility on US stock options. Low volatility (below about 17 which is where we are now) means the market is pricing in very orderly conditions. It’s a complacency zone High volatility (30 or above) means the market is fearful. This is a useful index for contrarians. Sell set ups often work really well when the index is in the complacent zone.  On the other hand the market tends to rally hard in response to good news when this index is up in the fear zone

The VIX was last in the complacent zone back in April. As we now know the S&P made a major peak in April when the news about Greece came into market focus. By the way, the April peak in the S&P 500 was also the end of a 5 swing advance from March 2009 and found a Fibonacci cluster giving a good set up for followers of this strategy

You can follow us on Twitter at RicCharts and DaveCharts



About Ric Spooner

Over 30 years market experience - professional trader, broker, director
This entry was posted in Market, Shares, Stocks, Trading. Bookmark the permalink.

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