With this morning’s push, I’m abandoning my shorts at 1395, with the plan of re-establishing them at 1404.   But, I’m not excited about going long at this level.  So, I’ll return to cash and await a sell signal, ideally at 1400-1404.

UPDATE:  9:50 AM

Just tagged the neckline from the last H&S pattern (solid yellow) which I think will provide some overhead resistance.  I’m trying another short here at 1399, with a stop at 1406.

Here’s a better look.

And, the same chart closer up.


There is still a lot of ambiguity in the charts.  Much of it stems from the sloppy channel formation on the upside.  This sort of thing can happen with low-volume rallies that are manufactured on an unstable foundation.

I’ll strip away some of the clutter to better show what I mean.  The chart below shows two distinctly viable channels.

The purple one has been the one we’ve focused on the past several weeks (with endless tweaking), but what if it’s the white one in play?   The bullish implications are clear — as the white channel allows up to 1410 today.  The purple channel’s gentler slope doesn’t even reach 1404 for another couple of weeks.

And, if we were to include all the shadows, we have a third possibility as well.


For charting purposes, we’ll stay with the middle (white) case for the time being.  The purple channel has been broken — even if only intra-day.  And, the yellow channel hasn’t yet earned its stripes with a mid-line tag or whatever.


Breakout? — 9 Comments

  1. For some reason Disqus keeps eating my comments here. It’s getting rather frustrating to post a comment, see it show up, and then see no trace of it half an hour later.

    I wanted to give some advice on SPY and other ETF options.

    Index options are preferable to ETF options for a couple of reasons, and you might want to consider trading them instead. (In other words, trade SPX options instead of SPY options).

    First, index options are cash-settled, so capital gains on index options are subject to section 1256 treatment. This means that the gains are taxed at 60% long-term and 40% short-term capital gains regardless of holding period. ETF options are settled in shares, and they are taxed as long-term or short-term gains depending solely on holding period. Since most of us don’t hold our options for a full year, this means that taxes on index options are drastically lower than taxes on ETF options.

    Second, because one SPX option controls as much capital as 10 SPY options, we only need to trade a tenth as many contracts. Most brokerages charge commission on a per-contract basis, so trading SPX options instead of SPY options cuts our commission costs drastically.

    It’s true that SPY options are very liquid and have tight spreads. However, some (not all) SPX options – particularly monthly contracts with near-the-money round-number strikes – have quite decent trading volume. Furthermore, with a little effort you can obtain very tight spreads on SPX options as well. QUOTED spreads on SPX options are huge – often several dollars per contract. However, you never need to pay the quoted spread. Calculate the midpoint of the spread. Round up to the nearest 10-cent interval and enter a limit order at that price. Sometimes you will get filled right away. If not, tack on another 10 cents and try again. You’ll nearly always get a fill within 20 or 30 cents of the midpoint, which is equivalent to 2 or 3 cents on SPY.

    • Thanks for your comment.

      I have the same frustration with Disqus.  I have been going back and forth with them for months, trying to resolve these and other issues.  I’m very unhappy with them, and they have done little to address the problems — if/when they respond at all.  If someone knows of a better comment organizing system, PLEASE let me know.

      Spud is correct about taxation.  Members with no offsetting transactions should discuss this with their CPA.  When I have time, I will sometimes try and split the spreads on SPX contracts; but, I don’t usually have the time — especially when trying to blog at the same time.  I’m usually more concerned about opening or closing a position quickly than I am with getting the perfect price.

      With very tight spreads on SPY, I’m usually comfortable placing market orders.  I know I’m giving up a penny or two, but it generally evens out over time.  And I pay $1/contract, so the commission isn’t really an issue.  Your mileage may vary.

      Readers should evaluate these issues as they relate to their own circumstances and choose accordingly. 

  2. Hello PW,  a little odd with the while channel and the purple channel.  SPX is respecting the while channel on the upper bound and it is respecting the purple channel on the lower bound.

    To see it clearly for yourself, remove the lower bound from the while channel and remove the upper bound from the purple channel.

    • Tommy, I believe that would be a MEGAPHONE top (or broadening top).  Bearish…JMHO.

  3. Pebble- what is your trading instrument for going long or short? /ES, spy, options, etc?

    • I like SPY options for the sheer liquidity and tight spreads, though I’ve been known to trade on VIX, XLF and a few other ETFs and their options.  I occasionally trade an individual stock but these are few and far between.  I get most of my returns from directional trades, so I try not to complicate matters with a long list of instruments to watch.

      • Disclaimer Alert:  I never recommend options or futures, though, as you can be right in terms of direction and timing and still lose every cent.  This past six weeks has been deadly for options traders who swing trade.  Most investors will do just fine buying/shorting SPY in conjunction with anticipated market moves.

    • Sure, but I don’t think we’d get there in a straight line.  IF that were to happen, I can’t imagine not having a significant reaction at 1404 — the .886 and the IH&S target.  And, it would mean blowing through the fan line connecting 1576 in 2007 and the recent 1422.