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Apparently jumped the gun a little yesterday by getting out at the .618.  The last 5 minutes saw prices ramp up through our entry point and our 1562.50 stop, but the basic thesis is still intact.  We should see a small reversal either here or around 1570.

I went long last Friday at 1539.86 [CIW: Apr 5 9:33] after riding a short position down from 1573, but got cold feet at holding a long position into the close — especially after bagging a 20-pt gain.

The market has gapped open more often than not over the past few weeks — typically on a change of direction.  This time I outsmarted myself and left several profits on the table.

I’ll play along on the long side and look for a loss of momentum at the .786 (1566.35) or the .886 (1569.77.)

UPDATE:  9:35 AM

Just reached the .786 of 1566.35.  Will revert to full short here with stops at 1570ish.

UPDATE:  11:35 AM

We got a nice sell-off from the .786 retracement (1566.51) but have yet to flesh out the rising channel I’ve charted.  Since it features such a steep slope, the bottom is rising rapidly — now up to 1560 or so.

The 6-pt drop to 1561.38 might suffice for a right shoulder on the IH&S Pattern, but it’s rather skimpy compared to the 12-pt left shoulder.  And, it’s not even one Fib level lower than the .786 turning point.

A more balanced right shoulder would take SPX down to 1555 or so.  That would mean a broadening of the channel, of course.  But, that’s to be expected with such a steep, narrow channel.

Keep an eye on the previous high.  A break of 1566.51 means this isn’t the right shoulder at all; it opens up the .886 at 1569.77.  But, a reversal shy of there (and especially 1566) means we’re more likely to tag 1560 or even 1555 before moving higher.

More later.

UPDATE:  12:30 PM

There’s the breakout, settling the question of whether we’re getting a deeper pullback or not.  Switching sides here for the run up to 1570ish.

Assuming we reach 1570, then what?

continued for members…

The IH&S Pattern, if it plays out, targets 1592 or so.  But, as noted above, the .786 reversal — at less than 6 points — was rather underwhelming.  So, don’t be surprised if we get more of a reversal at the .886 (1569.77.)

Note that the .25 line of the big purple channel lines crosses very close to that price level today — roughly 1570.45.  This will be the first attempt to cross back over since falling below it on Apr 3.

It also represents the .75 line of a channel formed by tags on the highs of Mar 14 and Apr 2 (in white, below.)

Interestingly, the current rising channel targets the red circle at the intersection of the purple midline and the red TL off the 2000 and 2007 highs — one of our upside targets.  So, we have to consider the possibility that the channel remains unbroken.

UPDATE:  1:26 PM

Just tagged the .25 channel line at 1571.63.  I’ll close out my longs here and try another short position.  Stops at 1572ish.

The bottom of the channel is currently around 1563.  But, again, a larger reaction is a real possibility.  The daily RSI chart hints that it could be significant.

A quick explanation of what I mean by “full short” is in order.  I am obviously open to higher prices on SPX.  My forecast suggests 1595 is a distinct possibility.

Yet, I expect a number of bumps along the way.  Even if we were to stay right here in this ridiculously tight channel and tag the red circle on Thursday or Friday, we’d likely see some meaningful pullbacks.

After shorting at 1566, for instance, I thought we’d drop to at least 1560.  For those who don’t mind doing a little day trading, a 12-pt round trip is well worth the effort. Just a few of these each week translates into another 100%+ year.

For those who do mind, simply holding long for 1576-1595 makes sense.  Less fuss, less muss — though, it likely means lower returns.  Looking at my trades for the past year, about half the returns came from longer term moves and half came from short-term trades.

Of course, we wouldn’t all necessarily agree on what constitutes long or short-term.  But, my notion of long-term is a multi-day (or even multi-week) move of at least a few percent.

In a typical year, we’d see several of these: e.g. the drop from April to June last year, or the rise from June to September.  I would typically use the term “core position” to represent trades made to take advantage of these moves.  For those who are looking to trade infrequently, the core position is the primary direction.  EW’ers use the term “impulse waves.”

But, obviously, we don’t always know how big a move will be when we first take a position.  And, there are no guarantees that our forecast will even pan out.  So, sometimes a core position changes rather quickly.

Short-term trades, likewise, can also turn into larger or longer-term trades. Sometimes, for instance, I expect a reversal at the top or bottom of a channel, but prices break through and I have to go back to the drawing board.

Now that the waters are sufficiently muddied, here’s what you should take from the use of the terms.  “Core long” means simply that I think SPX is going up and expect to remain long, but will be looking for occasional opportunities to pick up some extra returns by shorting — sometimes even going “full short.”

“Full long” or “full short” are merely indications of trading position that might or might not jibe with longer-term directional expectations.

In the middle of the trading day, when I can watch the market closely and pull the plug on a trade that isn’t working, I have no problem going full short to snag 5-10 points — even though I’m still expecting higher prices (core long.)

Likewise, I’m comfortable going full long in the midst of a broad downturn if I feel the bounce will be worthwhile and I should be able to pull the plug if the bounce starts to fail.

I know this can get confusing — especially since the market isn’t static.  It’s been suggested that I color code charts, etc., but I fear that would just confuse me.  The best bet is to stay familiar with the forecast or the scenarios I’m working with.

More in a few…

UPDATE:  2:45 PM

SPX just topped 1573.66, so I’m reverting to full long with stops here at 1572-ish.

UPDATE:  3:35 PM

Getting very whipsawy here.  I imagine we’ll push higher at the close, so I’m inclined to loosen my stops a bit, leaving my core long position in place while playing a ST short trade to 1565ish.

If you’re as worn out as I am by all the back and forth today, it’s not a bad time to step to the sidelines and wait for the MM games to subside.  Bottom line, I can’t imagine we’ve come all this way not to make a new high.

I will go into the close long unless the channel breaks down in the next 10 minutes.

UPDATE: 3:55 PM

Just tagged the “neckline” of the IH&S from this morning; 5-min RSI says we’re nearing the interim bottom.  Will close my short here in the last minute — hopefully around 1568.