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SPX Slingshot

11/08/11 11:06:30 AM
by Billy Williams

A common theme in the market could slingshot it higher as 2011 comes to a close, but a wild card overseas could stop it dead in its tracks.

Security:   SPX
Position:   Buy

The SPX has resumed its uptrend as it continues to higher ground after an impressive price reversal off the October 4th lows, and for 23 days since then, it has barely hesitated in its upward ascent. The move not only reflects the reversal in the intermediate-term trend but also reveals that the market has adjusted and/or discounted the negative news out of Europe for the moment.

The recent high on October 27, 2011, pierced the 200-day simple moving average (SMA) before pulling back, which was a little surprising, since the moving average acts as major resistance to price. The daily price bar that punched through it also managed to do it on an impressive thrust on solid volume. That said, price was due for a true pullback since early October and after a two-price bar decline, formed an inside bullish price bar on November 2 and a bullish signal was fired off on the following trading day, November 3, and did so right at the 0.382 Fib retracement level, which means that price is likely to challenge its former price high of the recent trend set on October 27, 2011, and exceed it. See Figure 1.

FIGURE 1: SPX. SPX has had a sharp rise from its October lows and managed to pierce the 200-day SMA that was just overhead. Now, price pulled back to a shallow 0.382 Fib retracement level, revealing that price could slingshot higher above the 200-day SMA as 2011 comes to a close.
Graphic provided by:
The rise of price on that day above the inside bar shows that momentum still favors the bulls and that this slight lull in price action was nothing more than a pressure release to build up steam and leave the 200-day SMA in the rear-view mirror. Taking into account the pullback into the .382 Fib retracement zone, the SPX could hit a likely target of 1332 before year-end.

This recent development in the SPX bodes well for the overall market, and individual stocks in particular as we head into the end of 2011 along with the year-end rush by money managers and investment professionals who typically run up the market going into the last quarter of the year. This is done so that they can pump up gains as most of their incentive pay is based on the annual return that is tallied up near the end of the year.

Understanding this motive and that they command billions of dollars worth of investment capital gives you a competitive advantage against the common trader who doesn't understand that at a seminal level, everyone watches out for their best interests. This underlying behavioral concept manifests itself in the price action of the market everyday and will be a dominant theme as 2011 comes to an end.

Look for a big runup in the overall market that will act as a rising tide and lift all boats or, in this case, all stocks, from the SPX's 0.382 Fib retracement. Pay particular attention to the long side of the market now that the SPX is dancing along its 200-day SMA and is likely to slingshot above it.

That said, Greece is the wild card. So be sure to use stops and control your risk if things spiral out of control over the pond because it is almost a sure bet that the after-effects will wash ashore in the US and, as a consequence, the equity market as well.

Billy Williams

Billy Williams has been trading the markets for 27 years, specializing in momentum trading with stocks and options.

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