Breaking Trend

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The S and P 500, mini futures daily chart.

The S and P 500 futures have broken a recent uptrend line. The cash market closed just at the trend line support.

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The S and P 500 cash market, daily chart

The indicator I’m using is John Carter’s proprietary squeeze indicator, which shows the quality of the price action– in this case slowing or moving downwards. For the past year, any time the indicator turns red, we have a buy point that also corresponds to increased volatility and greater intraday price swings. 

One could have set up for this move last week when the indicator turned dark blue by selling a S and P 500 future and buying a Dow futures contract.  The futures pair trade provides about the equivalent of short 100 shares of SPY (the S and P 500 ETF). This is a hedged hedge, as it were. By buying a Dow future against the short S and P position, one can remain in the trade longer (that is, without terrible worry that the short position will blow up and present an unacceptable loss).

A move to 1850 will probably signal to me a good moment to close the position. Hopefully, the market will continue to rise after such a pull back.

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The S and P 500 cash index daily chart during the tumultuous summer of 2011

Should the market become unstable, as during the summer of 2011 and the Republican lead attempt to force debt ceiling concessions, options sellers have the best opportunities to cash in on quickly rising and falling volatility (i.e., options pricing). One can notice that the market hit its low point when it touched the long-term channel line support.  Will such trend lines continue to work in the future? It depends on the collective actions of traders and large fund managers.

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Weekly and Monthly S and P 500 futures charts. The long-term trends remain intact.

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