TGIF – Stocks Slide Into The Weekend – What’s Next?

Wheeeee!  

I love a good sell-off – especially when we called it and we're well-prepared. We were skeptical of the market rally on Monday and, in our PSW Morning Report (which can be delivered to you pre-market for a small fee), I said:

"We'll see if the market is ablfe to get excited about more Trade Talks and we still haven't cracked 1,600 on the Russell (/RTY) but as long as the S&P (/ES) is over 2,800 – all is technically well in the markets…  7,200 on the Nasdaq (/NQ is a good shorting line for today as is 1,590 on /RTY, since that's the 200 dma – tight stops above!"  

30 points is a 1% pullback on the S&P Futures (/ES) and, at $50 per point per contract, it pays $1,500 – making it an excellent portfolio hedge (using $6,600 of margin per contract). What makes Futures Trading such a valuable tool is that you don't have to wait for the market to open to make an adjustment. Also, there's very little friction cost (the cost of entering or exiting the trade, including fees) so you can use it to very quickly adjust your portfolio at a moment's notice.  

Generally, at PSW, we don't like to enter a Futures trade unless there is a significant support or resistance line we can use as a stop because Futures contracts tend to move quickly and erratically EXCEPT when they run into significant support or resistance, where they slow down enough for you to catch your breath and see what's real. Since we are not technical traders but Fundamental ones – having the time to check the news flow is critical in deciding when to get in and out of a Futures trade.  In fact, we took the quick $1,500 gain on Monday and we concentrated on the Russell (/RTY) shorts on Tuesday as I said in that Morning Report:

/RTY 1,568 should be support but, if not, could see 1,550.  Tight stops in any case but I'm happy with these gains!

As you can see, almost all the rejections sent us down 100-200 points so let's not get too bullish as all we got yesterday was a bounce off the fall from 2,820 on Monday to 2,770 yesterday so that's 50 points and that means, per the Fabulous 5% Rule™, that we can expect 10-point bounces to 2,780 (weak) and 2,790 (strong) so now we're watching 2,790 as the fail line and, if we can't hold that, we'll be back to 2,770 and likely on the way to a full 1.25% pullback from 2,800 to 2,765 and, failing that, the next stop is the 2.5% line at 2,730, which we last tested on 2/15.  

Notice how well the 5% Rule is being obeyed.  That also tells us that 2,835 is the 1.25% line but we haven't made that and we are finding resistance at the 0.625% line, which is 2,817.50.  We don't usually bother at that level but it is ineresting that that's exactly where we topped out yesteday, which indicates there is a LOT of technical resistance over 2,800 and it's going to take a lot more than promises of trade progress to get us over that hump. 

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Disclosure: Our teaching theme at Phil's Stock World is "Be the House, NOT the Gambler." Please see " more

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