With the increase in market volatility over the last couple of months, it can become confusing to know how to successfully navigate a profitable trading strategy. Stocks you may be following seem to be jumping higher very quickly and just as quickly drop all of the sudden. One of the first steps I recommend before entering any trading position is to analyze the market itself for the best potential entry points. I might look at the Dow, the Nasdaq, or my personal favorite, the S&P. By analyzing the S&P I can look and find the most opportune points at which to enter my trading positions.
If you notice the chart I have highlighted below, you will see it is the current 1 yr. chart of the S&P 500. I have added 2 details to this chart that I find of most interest at this time. The red line is the 200-day moving average (MA) of the S&P 500. The second is a simply line of support that has been created by this index.
S&P 500 -1YR
First, take a look at the MA. You will notice that the 200-day MA has been acting as a resistance for the S&P over the last several weeks. The 200-day MA can tend to be an important level for the S&P, as you see back in June and July of last year when it acted as support. The next thing I would like you to notice is the black support line I have added to the chart. The S&P has been “bouncing” on this support level since February. These (2) price areas can be very useful in constructing a trading plan.
So, how might one trade this market based on the information we see above? Here are some of the questions I’d be asking:
1) “Can we hold the 200-day MA?” Today we are currently holding this level, and if I believe it will continue to do so, this might be an excellent opportunity to enter a long position.
2) What if the move above the 200-day MA is just a fake-out (as with the support tests back in June/July) and we break back below that MA? If that were to happen, I would expect the S&P to fall back down to the support line. So, if we cannot hold the 200-day MA, wouldn’t that be a great opportunity to enter a short position?
3) If we fall down to the support line, wouldn’t this be a possible chance to enter long positions in which to expect another bounce higher?
4) Lastly, what if we fall down to the support line and do not hold it? I would expect more selling, thus giving me another excellent short opportunity.
The range between the 200-day MA and the support line is a very tight range. With the recent volatility in the market, it can be a very challenging process to try to trade within this range. Waiting for the most opportune times that I have outlined above could provide you with the highest probability trading points. No matter what your strategy or when you decide to enter, always remember to use protective stops and you’ll be around for the next trade.
Christian Tharp, CMT