The bulls won....for the short term anyway

Hi there, and welcome back to CRI's S&P 500 blog.

Because I belive we are nearing a key pivot point in the season trade I have included both the weekly and daily chart for reader reference. As of our last post it honestly looked like we were about to tip over. But in typical market fashion, we reversed off the lows and punched our way through the top of the 28 week trading range. The bulls indeed won the battle and have prevailed . The question is, does this represent a low risk buying opportunity or a potential trap?

Here then are the charts and my associated comments:





As a trader, I just want to go with the price action. As the daily chart included suggests, it looks like the market wants to push its way up into the 98 area (Bull flag formation on recent breakout). But the investor in me says, wow, that's a lot of risk to take (50% rule and Gap a long way down) for such a little reward. As well, momentum and volume have not moved higher on the recent breakout suggesting that the market isn't nearly as strong as price would lead you to believe. On top of that, we just left the month of May and the time tested cliche doesn't say 'buy in May', it says 'sell in May'....

Put it all together and I still believe we are in the process of topping out after a climactic 'V' bottom bounce. Notice that the rally has just now taken us back to the 200 day SMA. This 'cleaning-up' period may take the entire summer to play out - if not into the fall. And as previously stated, my target window on a correction will be a serious test of the 73 area. Yes there is upside potential still but now the market is quite risky again.

For those that where watching our potential sell signal from last posting ('on a move through 88.13') it never happened and so as a result I am still waiting patiently to put on a short position on the S&P 500. I notice too that the Dec 85 puts are slowly working their way lower in price. I would ideally like to buy 6 months of time, and we know roughly where this market may go on a correction, so I will move my attention to ROQ-XG wanting to buy at or near $2.50. Should the market come back to 50% level over the next 6 months this option will have an intrinsic value of $4 to $5 dollars or double what we want to pay. Currently they last traded $4.75...

So in summary then, the market has climbed the wall-of-worry. We have broken resistance and are pointing higher for the short term. At the same time, we have gone straight up from the bottom. Yes the longer term picture is looking better but a short period of cleaning up ought to occur. I am not buying this rally. I am using this rally to buy discounted 6 month Put options. While I do not currently have an SPY position, I would like to and will be watching closely for an entry signal.

While not specific to this board, it ought to mentioned I am building a Dec. put position in GE and a Dec call position in TLT (please refer to the June Newsletter - due out in 2 weeks for more on those trades).

And of course, please remember, option trades are for risk capital and (as options can expire worthless) buying calls and puts are considered by the investment industry as high risk trades!

Don't commit more than 5% of your 'stake' on any one play. If you do get filled be sure to have your order to sell (at least 1/2 position) working right away at your taret.

That's all for this week,
Brian Beamish FCSI
The Canadian Rational Investor
the_rational_investor@yahoo.com
the-rational-investor.com