Studying the weekly chart on the SPDR S&P 500 ETF (SPY) you can notice that in the previous week we closed the neckline and formally produced a bearish Head and Shoulders top. I brought this pattern to your attention several weeks ago, and we have been closely watching it since. If you keep up on my live Facebook and Twitter updates then you knew on the dot when the neckline was taken out last week and the short ETF I purchased.
In the episode I draw a blue trend line for the neckline on the weekly chart so that you can observe how it was broke. That was a demoralizing slaughter for bulls and a enormous victory for bears. The volume is doing a classic stair step pattern as selling has increased into the testing and break of the neckline.
I debated with a stock analyst last week that said that I should pay little attention to the breach of the neckline for the reason that it happened on low volume. This low volume, he said, meant that the S&P 500 was not going to go any lower. He was wrong and I was correct. Be trained from his error. Price action trumps volume every time. Volume is often a lagging indicator.
The MACD on the weekly chart reveals a double thrust to the downside on the histogram bars. Double dips to the downside are exceedingly bearish. More often than not the histogram bars shape neat waves above and after that under the 0 line. Double dips are a bit unusual.
I fiercely advise you to be short this market. You can do a Russell 2000 small caps short, a S&P 500 large caps short, or you can short an specific industry like consumer services or finance. Whatever you decide, you have to recognize that it is going to be easier to earn money playing the short side rather than on the long side right now. Attempting to make money on the long side will be like a fish swimming upstream. You can still do it, but it is going to be a lot of work. It'll be easier to trade with the undercurrent rather than against.
I can really kick myself because I was short this market for most of May and then from June 7th to June 18th a paradigmatic Head Fake was produced that made me realize profits in my short and go long. As you can see from the stock trading history that is updated live by means of Google Docs on my blog, I experienced two consecutive losses back to back on the long side because of this Head Fake. That is just part of trading, you will never get all your calls correct. My current accuracy is between 70% and 80% with my long term, 10 year accuracy rate at 75%. As long as I cut my losers quick (5% loss) and let my winners ride (between 5% and 10% profit then sell), I really like this 70% to 80% accuracy.
Nevertheless one thing you will see about me, I make no apologizes when I get a call wrong since it is just part of stock trading. I know that as long as I can get 70% to 80% accuracy, I will make money. The significant thing to concentrate on is not your wrong calls, but in repositioning yourself to be on the right side of the trade. The whole goal is to get it right as swiftly as you are able to.
In the video below, I perform technical analysis on SPY in three time frames: weekly, daily, and hourly. You do not want to miss this video and in particular where I show you the hourly chart and what I believe is end of quarter window covering by money managers as they reposition themselves. I also show you what stocks institutional traders repositioned themselves in.
Have a good 4th of July holiday weekend.
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