Wednesday, June 24, 2009

Technical observation of S&P 500

It appears that after today's minimum gain, the S&P 500 is on the brink of hitting the Golden Cross (bullish; when the 50-day and 200-day MA's cross while both are going up). However, this has not yet occurred as although the slope of the 200-day MA has flattened and is nearing zero, it has not yet turned positive. But the 50-day MA (900.5) did cross the 200-day MA (897.2).

If S&P 500 stays positive for the next few days, the 50-day MA would remain above a positively sloped 200-day MA, which could be viewed as a bullish signal. However, even a small decline in the index can turn slope of the 200-day MA negative again.

The 50-day moving average is almost at a turning point too. The slight increases that we saw these last two days in the S&P 500 prevented it from going down.

With all of that in mind, we could see a bullish signal for the S&P 500 the next few days, if the market continues to go up. However, if not, and if the 50-day MA becomes negatively sloped, we could see S&P 500 at 850 again.

For this reason we think a simple straddle strategy might be appropriate for SPY. Buy SPY Jul 91 calls and SPY Jul 91 puts. Although we're entering the Summer season, which has not been volatile historically, we're thinking that important economic news (initial claims, personal spending, consumer confidence, and unemployment rate) which will be released the next 2 to 10 days, combined with the current state of the economy, will help increase volatility. We also looked at the Bollinger Bands and it appears that we're at a very narrow range right now, which could mean that a breakout is due.

Lastly, the ADX (avg. directional index) is sloping upwards but only at 18.7 right now. A slight push above 20 could indicate a positive trend in the making, which will likely bring many others on board to long SPY for the short-term. Of course, if such trend is reversed and ADX remains below 20, many may jump the ship and push SPY back down to $85 (or S&P 500 to 850).

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