The Battle Rages On
16th August 2009
We have now been holding around the 1,000 level on the SP 500 since the first of August. That’s two full weeks in which the bulls and the bears battling it out for control of the financial markets. We have not determined a winner yet, but one thing is for sure, no matter if you look at a daily or a weekly chart, the stock market is losing momentum. The most obvious indication of that is the divergence between Momentum and Price. This would normally indicate that the stock market is headed down.
While this is all well and good, the problem I see with playing this market right now is the fact that many of the talking heads keep shouting that the stock market has gone up too far and too fast. While I would agree with that thought, I must remind you that these are many of the same guys that were calling for a big fall in the market a month ago because of the formation of the infamous ‘Head and Shoulders’ pattern on the stock charts. The problem now, just as it was then, is jumping the gun by anticipating what is going to happen. If you were one of those people that bet the SP 500 would break support around 875 you certainly got burned when that pattern failed and the market rocketed up 12% in just two weeks.
You have probably been successful in the past with trades when you anticipated correctly what the market was going to do. The questions you must ask yourself though are: Was I just lucky? Or would I have been better off if I waited for confirmation from more than one signal before placing that trade?
Probably the safest way to play this chart would be with a bear call spread, but I am going to wait to see what direction the market tells us it wants to go in before I place my next trade.
JD
SP 500 Divergence
