What’s inside:
- The SP 500 day-to-day ups and downs make trading more favorable for the nimble day-trader
- Market becoming very oversold in short-term
- A move towards trend-line support in conjunction with oversold could present a nice trade from the long-side
The see-saw price action in the SP 500 (FXCM: SPX500) the past three days – big down, big up, big down – is making for good quick-flip conditions for the day-trading crowd as volatility finally emerges after a dull end of summer, but isn’t presenting a compelling set-up for the swing trader just yet.
In Tuesday’s commentary we noted: “If the SP starts to fade back towards yesterday’s low, we will want to pay attention to how it reacts to determine if it is a retest or likely to be another leg lower.”
If the market doesn’t get pep in its step very soon we look likely to head lower in the immediate future, with a full test of the Monday low at 2108 and then the Feb trend-line quickly comes into focus around the 2100 mark. (Note: Levels are CFD prices.)
Market very short-term oversold: The percentage of stocks in the SP 500 trading above the 10-day moving average dove to just under 8% yesterday, about as low of a reading as you will see. This type of oversold reading has tended to lead to bounces in the short-term. Looking back over the past five years the %above has only gone below 8% on fourteen occasions, of which 13 times the SP was trading higher five days later. Compelling. (It’s only one metric, but many of the indicators used to measure extremes are highly correlated.)
SP 500 Index w/%10-day
Support close at hand coupled with oversold conditions is reason for discomfort (poor risk/reward) in looking to establish a short position with a longer time-frame outside of a day. But should we see trend-line support met with the above described conditions in place, then we will soon have the makings for a potentially solid trade from the long-side. It’s possible we have already found support at the 6/8 peak, but price action is still weak enough at this time it looks as though another leg lower could develop into the trend-line first before seeing a tradeable low.
Hone your skills as a technical trader and check out one of several free trading guides designed for traders of all levels of experience, as well as “Traits of Successful Traders”.
—Written by Paul Robinson, Market Analyst
You can follow Paul on Twitter at @PaulRobinonFX.
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