S&P 500 update

Hi,

In yesterday’s post on the potential triangle set up I said I’d follow up with some thoughts on trading strategy if we got an entry trigger. The first chart below outlines one approach.

There is also a possibility that the current upswing will be the final rally in an ABC correction. I’ve outlined how this might work in the second chart below.

S&P 500 - Daily. Source: Bloomberg

The profit objective here is calculated by measuring the height of the triangle at its base and then adding that height to the point at which price broke through the triangle resistance. Some traders will apply a small price filter to deal with situations where price gets close to the objective without quite reaching it.

This strategy uses a stop trigger at 61.8% of the distance from the break out point to the target. If price hits that level then the stop is made dynamic. The next day it is moved just behind the low of the candle hitting the trigger. This process is repeated until there is a candle with a low above 1252. Once this happens, the stop is left at 1252.

The second chart below shows another way of looking at this chart.

 This shows that the move down from the April peak at 1370 has so far taken the form of 3 swings. These moves often take the form of 5 waves or swings. If the current rally ends somewhere under the resistance zone formed by the old  low at “1”, the overall downtrend continues to look like a strong, impulse move with at least one more major down swing a distinct possibility.

 The dashed red line on the chart represents a resistance area a little above “1”. If this is breached the chances of the overall major downtrend still being intact are reduced

S&P 500 Daily. Source: Bloomberg

Corrective rallies often take the form of an ABC or 3 swing move. The current rally now has a potential ABC form after taking out the high at “a” last night.

 Now that price has moved above “a” an overlap back down through that level would make the current rally look weak and potentially like a correction suggesting that the major down trend has resumed.This would be an indication of failure for the long triangle set up and is why the stop is placed at a breach of the support zone below “a” represented by the dashed blue line.

Another feature shown on the first chart is that last night’s candle looks like a wide range break. This is a close cousin of the gap where price makes a really strong move past a resistance or support line. The wide range break consists of a large candle with only a small proportion of it under the resistance line. Strong breaks like this perform well which is another justification for the close stop just behind the low of last night’s candle 

Regular readers will be familiar with the Gartley strategy that uses Fibonacci clusters to identify levels with the potential to represent the finish of an ABC correction. The strategy involves selling for a resumption of the downtrend if price makes a trend peak at either of the Fib cluster levels shown on the chart

Followers of both the triangle and Gartley strategies might take an early profit and reverse their position if one of the Gartley sell set ups is triggered

For the record the red Fib measures are retracements of the move from 2 down to 3; the black measures project multiples of  the distance from 3 to “a” beginning at “b”; the green measures project multiples of the distance from “a” back to “b” beginning from “B”    

Cheers

Ric

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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