Larry’s note: Welcome to Trading with Larry Benedict, the brand new free daily eletter, designed and written to help you make sense of today’s markets. I’m glad you can join us.
My name is Larry Benedict. I’ve been trading the markets for over 30 years. I got my start in 1984, working in the Chicago Board Options Exchange. From there, I moved on to manage my own $800 million hedge fund, where I had 20 profitable years in a row.
But these days, rather than just trading for billionaires, I spend a large part of my time helping regular investors make money from the markets. My goal with these essays is to give you insight on the most interesting areas of the market for traders right now. Let’s get right into it…
If you’ve been following along, you’ll know how important price levels are as a trader.
After all, a stock’s next move can be determined by holding or breaking certain price levels.
These levels go hand in hand with indicators like moving averages (MA) and the relative strength index (RSI). When combined, these tools not only help identify trends, they help establish optimal entry and exit points – things that will give our trades the best chance of success.
It can be an easy trap, however, to only view these tools from our own perspective…
What we also need to appreciate is the broader market. In other words, how other investors and traders might interpret the same levels and indicators that we’re looking at.
For example, a week ago we looked at the importance of the 50-day MA – one of the most commonly used time intervals by private and professional traders alike.
We saw how after touching the 50-day MA, a new wave of buying typically sent the S&P 500 index (SPX) higher.
With that in mind, today I want to take another look at SPX. Because once again, it’s approaching an important test.
Let’s pull up the chart…
S&P 500 (SPX) Index Price Chart
This chart shows SPX going back to the start of this year.
The blue dotted line is the 50-day MA, representing the long-term trend. The red-dotted line – the 10-day MA – is the shorter-term trend. The 10-day MA has stayed above the 50-day MA, meaning the uptrend has remained in place.
Apart from March, SPX has bounced off the 50-day MA all year – as recently as August 19. As we discussed in last week’s essay, it has done that seven times out of eight so far.
As the chart shows, right now SPX is again closing in on the 50-day MA…
Given its recent history, you can be sure both traders and investors will be watching the upcoming action this week as close as ever.
If SPX touches the 50-day MA, they’ll all be watching to see if it will bounce for an eighth time.
If not, as I wrote last week, then a change in trend could be in the cards. And that could mean some potentially strong money flowing into short trades.
So, given these scenarios, what am I looking for?
You’ll notice that I’ve also included the relative strength index (RSI) with the chart. However, rather than using it only to gauge if SPX is overbought or oversold, I’ll use it to help determine momentum.
Let’s take another look at the chart, this time focusing on the RSI at the bottom…
Right now, the RSI is trending down, showing SPX has lost its upward momentum. So, what happens next with the RSI is key…
You can see that each time the RSI formed a V-shape trough, SPX subsequently rallied. If that happens again – and SPX bounces off the 50-day MA – then that could be the opportunity to go long.
However, if the RSI instead moves lower, I’ll be looking for two other factors to see if a short trade could be in the cards:
First, SPX will need to trade down through the 50-day MA.
And second, I’d then be looking for the 10-day MA to cross down over the 50-day MA before considering going short.
Either way, it all adds up to a very important test this week for SPX.
We could be right on the verge of either scenario playing out.
Editor, Trading With Larry Benedict
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