Monday, May 11, 2009

Bullish Trade Set-Up for Tomorrow

Click on Chart to Enlarge

Last Thursday the index ETFs showed bearish reversal candlesticks. However, Thursday's high in SPY and DIA was exceeded Friday, and today was not a type of session that gives much confirmation to that potentially bearish candle pattern. From a candlestick perspective this would suggest that the uptrend is still likely in effect.

Last week I had said that I thought that 940 would be a cap on prices if a rising wedge (contracting triangle) was the pattern that is forming off the March lows. The recent highs around 930 and change suggest to me that any further highs likely rule that scenario out, in favor of a complex corrective pattern that should continue at least a bit higher (see this post).

The short-term model for the S&P is back nearing oversold, and prices are easily holding the 20 day moving average as of today. If I throw all other types of analysis out the window, and just look at the moving averages for the main trend and the short-term model for extremes against the trend, I would say that a good bullish set-up is occurring, so that is how I am going to approach this tomorrow for a potential trade.

In addition, I had mentioned last week that a potentially good bullish set-up would occur if the market had an initial knee jerk negative reaction to the stress tests which generated oversold conditions. That is not clear cut in my eyes (prices ran up on the leaked news initially), but if we get oversold tomorrow with a controlled price decline, that would fit with the general picture I guess.

The chart above shows SPY with the RSI (3) which is usually a good guide to short-term overbought/oversold conditons, as well as the DMI and Aroon Indicator which are "trend finders." Last time I showed these, the Aroon indicated a strong uptrend, but the ADX line on the DMI had not turned up yet to confirm a trending market. Now both are showing trending signals. One thing to look for to help locate a potential top in coming days/weeks will be for the ADX line to decline for 2 straight days. I will re-evaluate whether or not to look for a longer term bearish trade when the short-term model reaches overbought levels again.

On the trading front, I will almost certainly post a trade tomorrow if the market is down and the short-term model becomes oversold.

If you happen to still be in the last BGZ trade :) then I would suggest watching a 15 minute stochastic chart of SPY and exit if/when the slow %D line gets oversold tomorrow or certainly exit if I post a bullish trade tomorrow.


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