Tuesday, December 20, 2011

A Change in Direction

The near-term market direction has changed from bearish to bullish, as measured by SPY, the S&P 500 exchange-traded fund.

SPY has been trading in an hourly-chart downtrending channel beginning Dec. 7. Today the price reversed sharply, opening above the channel and pushing decisively higher.

On the daily chart, SPY continues to trade within a downtrending channel that began Oct. 27, and on the weekly chart, within a downtrending channel that began April 25.

As always, a change in the near-term trend doesn't necessarily presage a change in the longer-term trends. Or preclude such a change, for that matter.

As it turns out, the daily-chart and weekly-chart trends are aligned. A decisive break above $126.50 would suggest that a mid- and long-term trend reversal was beginning.

A break above $129. 42 would mark a higher high, strengthening the bullish case and switching the daily-chart trend to bullish from the Nov 25 low. A break above $135.70 would switch the weekly-chart trend to bullish from the Sept. 30 low.

My strategy since early December has been to concentrate on bearish plays. In cases where a bullish position is unavoidable -- existing covered calls, for example  -- I've insured the position by buying puts during this near-term bear phase.

Today's near-term phase change alters my strategy in several ways.

First, I narrow the stop/losses on my existing hedges and bear positions. (Three were stopped out this morning.) I prefer to be stopped out rather than simply placing an immediate sell order because if the market should reverse before my stop is taken out, then I avoid the cost of a whipsaw.

Second, I stop entering new bear positions, but I don't yet begin opening new bull positions until the new weekly chart uptrending channel is established. An uptrending channel requires three points: A starting point, a higher high and a higher low. I draw a line connecting the start and higher low, and then a parallel line passing through the higher high.

Once that channel is established on the hourly chart, I can start laying on positions.

The 20-year Treasury bond exchange-traded fund -- TLT -- presented a mirror image of SPY. It broke below an hourly-chart uptrending channel and is trading within a downtrending daily-chart channel and an uptrending weekly-chart channel (which can also be analyzed as a three-year-old sideways trend).

For TLT, the breakout is a signal to buy puts as insurance while still holding on to my shares.

Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.
No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decision decisions for his or her own account, and take responsibility for the consequences.

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