Wednesday, September 11, 2013

Prepping For Possible SPY Trade

The S&P 500 is moving into a tipping point position. Looking at both fundamental and technical indicators show a decent trade set up for the rest of the year. The main question for a trader is which way will it go and by how much?

Fundamentally, there is a large amount of data that can move the market. The Federal Reserve will be meeting next Tuesday and Wednesday. In that meeting, there will be an important decision in regards to the level of Quantitative Easing that they do going forward. If the Federal Reserve decides to taper the QE by a large amount per month, the market will probably head lower. If the taper amount is small to zero, the market will rally past the all time high and continue the leg started in late August. To be clear, this writing has nothing to do with whether or not the Federal Reserve taper decision is correct or incorrect. It is simply a guide and opinion as to how to trade the market based on the Federal Reserve's policy decision next week.  Also, a large amount of companies within the S&P 500 will be releasing their quarterly earnings during the month of October.  Any surprises by a large number of companies to either side will certainly affect the direction of the market. If both of these topics are of the same sentiment, the market should move a  significant distance in that particular direction.

On the technical side of things, SPY is showing many indicators that can be used by both the bulls and the bears. The high for SPY is just a a few points away from the current price. Stochastics on the daily and weekly charts are at a neutral point. The Bollinger Bands are closing indicating increasing pressure for a move. A bullish move would continue a possible leg forward another 5-10 percent. A bearish move would be indicated by the possibility of a right shoulder of a Head and Shoulder formation; which could send SPY down 10% or more if the Head and Shoulders formation is confirmed.

The start of the plan will be to wait until after the Federal Reserve decision next Wednesday. A straddle position before the announcement is also a way to trade if you are worried about missing a portion of the move. But you are going to lose value in the incorrect side anyway. So I prefer waiting. Start a partial  position in SPY going the way of the sentiment created by the announcement. Make sure to put a stop order to protect against whiplash. As confirmation of the move happens through the first couple of weeks of October, the full positions should be created.

If a bullish scenario is apparent, then start a December Call Option position after a breakout of $170.00. The exact option cannot be known yet but it should be as close to in the money as possible. The run should get to $180.00 by the end of the year. If a bearish scenario is apparent, a December Put Option position should be made. A right shoulder should form in the next week. A race to $154.00 could be hit.

As always, do your own due diligence. There are no positions held or trades on right now in SPY.

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