Even though some stocks are attractive, the S&P 500 has broken its support of the 200 day moving average. Remember, a rising or falling tide brings with it all ships. Visit our older updates where we revised our strike prices down. It will come in handy at this time. However, there is no need to panic yet as this has been an orderly sell-off, not a capitulation. Chart to follow.
Update: 11/21/2012 S&P 500 Snaps Back Above 200 (Black Line)
The S&P 500 is now above the 200 (black line) which is good (bullish). The long-term trend is still intact as well. The 20 day (orange line) is now the next resistance. We are in a narrow trading range as a result. Look the for the 20 to be broken to the upside if the debt issues are constructive. (Or vice versa if not).
Update: 11/21/2012
“This time is different” I said when we bought calls on the SPY Wednesday, the day before Thanksgiving. I bought SPY calls 3 months ago in September and lost every penny. I thought, “this is the time. This is the time the bulls finally jump on board because they’ve been waiting to for so long but were too scared, scarred from 2008. But, this was the announcement we were waiting for (qe3).” So we bought calls and lost.
This time, we are thinking in new time frames. We bought call options 3 months ago (September) and lost when the S&P 500 fell. If you look back to last April, the same thing happened. Here’s where I’m going with this; the pullbacks(retracements) on both occasions lasted between 50 and 68 days and were almost identical.
It was no coincidence. Traders who use fibonacci retracement indicators knew this, and bought calls then- after the fall. You wouldn’t have known to buy then because the 200 day moving averages were broken and you panicked. Had you known the Fibonnaci retracement levels, you would have known exactly when to buy. There are other positive catalysts traders are using such as the fiscal cliff talks being constructive, the S&P 500 breaking above the 200, corporate balance sheets getting stronger etc. But, the Fibonnaci indicators seem to be showing that this last bounce we got was a meaningful bounce from the 38% retracement level. (For more on Fibonacci signals and theory see “Trade Professor”, top right).
So we bought calls on the SPY. If we go lower, we will sell puts on SSO and really make some money. We bought on the 200 day moving average black line. (See chart above)
Here is an interesting video on Fibonnaci Theory.
http://www.investopedia.com/video/play/trading-with-the-golden-ratio/
Update: 11/23/2012
Closed our SPY calls for roughly a 50% gain with the Dow up 100 points. The Dow finished up 171 points this Black Friday.
We got the bounce we were looking for in the S&P 500 according to the 200 day moving average being held and the Fibonnaci levels holding. Now, we are up against the 100 day moving average (purple line). Let’s see Monday if this holds. Any pullbacks to the 200 (black line) will be viewed as buying opportunities with stop losses underneath.
To summarize, we got a break of the 200 on November 14th, but as we mentioned, it was an orderly sell-off that resulted in a snap-back above the 200 day moving average. We then simultaneously broke the 20 day to the upside (orange line) and held the all so important 38% Fibonacci retracement level. We were off to the races after that move. Resistance is now coming in at the 100 day moving average (purple line). Stay tuned next Monday for updates.
