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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. And, I’m featured in the book Market Wizards, alongside investors like Paul Tudor Jones. 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… |
There certainly has been a lot of news for investors to digest this year…
Right now, the biggest story is the ongoing situation in Ukraine.
That comes against the backdrop of rising inflation and the prospect of multiple rate rises. The numbers and sizes of those rises add another layer of uncertainty over the market.
It’s no wonder that investors feel lost after rising oil prices and other tech stock earnings.
Alongside runaway oil prices and a mixed bag of earnings results from leading tech stocks, and it’s enough to make many investors feel lost.
We’ve seen that confusion play out almost daily this year with the switch from “risk on” to “risk off” assets.
While traders need to be aware of current events, watching the news too closely can lead to fear. Even worse, traders should never align their trading with these emotions.
Because ultimately, what our logic tells us the market should do often doesn’t pan out…
That’s why I always keep an eye firmly on the charts. I like to watch key price levels – just like what’s happening right now with the S&P 500 Index (SPX)…
S&P 500 Index (SPX)
Source: eSignal
On the chart, I highlighted two of the major moves since June 2021…
The September 2021 high (A) preceded the S&P 500’s 6-7% fall into October. Then, the rally began into the end of 2021 (B) before the sell-off took hold of the market through January.
The important takeaway from both of these moves is where that selling dwindled out (around the lower orange support line).
Both times after the retracement from ‘A’ and ‘B,’ SPX tested this price level before ultimately rebounding higher.
But while both moves from ‘A’ and ‘B’ finished at that support level, there’s a major difference between the two…
In the retracement from ‘A,’ the 10-day moving average (MA – red line) crossed down over the long-term 50-day MA (blue line). After finding support, SPX went on to rally with the 10-day MA crossing back above the 50-day MA (a bullish signal).
However, while the 10-day MA crossed down over the 50-day MA in the fall from ‘B’ – and SPX bounced off support – the 10-day MA failed to move back above the 50-day MA.
As you can see below, SPX tried to rally at both ‘1’ and ‘2’ on the chart before running into short-term resistance (upper orange line).
S&P 500 Index (SPX)
Source: eSignal
These failed moves higher also coincided with the Relative Strength Index (RSI) running into resistance (50% – green line).
With the RSI in the lower half of its band (below the green line) and the 10-day MA moving further below the 50-day MA (both bearish signals), SPX is about to retest support.
At the same time, the RSI is closing in on oversold territory (below the lower grey line).
And that’s why this support level is important…
If SPX breaks strongly below support and the MAs continue to move lower, then we can expect the current down move to keep going.
If SPX tests support for a third time and holds, then it becomes an even stronger level.
If it fails to break support again, then sellers will exit their short positions.
And this could cause a quick and very sharp bounce…
For us, that could provide a profitable trade to the long side. The key factor here is that any trade we make should be based on this support level… not the news cycle.
Regards,
Larry Benedict
Editor, Trading With Larry Benedict
Reader Mailbag
Today’s feedback comes from a subscriber of my spread trading service on the S&P 500 (SPX), The S&P Trader…
Wow, you are on fire!
It’s 10 for 10 over the last two weeks with a triple-daily winner today (February 22). I love the smart box-in trades. Plus, we are set up for another nice potential gain looking ahead to tomorrow!
What a phenomenal job and a great strategy! This just shows your skill in navigating bear markets and playing the credit spread game with the S&P 500 (SPX). Keep up the great work!
– David
P.S. We’re excited to hear what you think of your new eletter, Trading With Larry Benedict. Let us know at [email protected].