Another day, another rumor, yet still no resolution in sight. Markets continue to swing wildly on every uptick and downtick of European bond yields and a new "solution" rumor emerging. However, these swings have done nothing more than drive cash to the sidelines.
The chart below shows the SPDR S&P 500 Trust ETF (SPY - 132.45) over the past several months. Volume has been declining for the past eight or so days, indicating less conviction among market participants. Until we see some sort of volume spike and/or new piece of (non-rumor) news, I would expect the current environment to persist.
Many traders are looking toward the next round of European bond auctions, starting Thursday, and even the coming Greek elections this weekend as the only near-term market catalyst.
You may also notice on the chart above that the SPY appears to be forming an inverse head-and-shoulders pattern on a short-term basis. This is typically a bullish reversal pattern, but nothing is certain until it plays out. If the SPY did dip back near its 200-day moving average (white line), currently perched near the 129 level, I'd be a buyer on any extreme weakness/fear, and use a stop below that trendline.
If we see continued strength from here, I'd be very cautious and wouldn't look to add new swing long positions until the 134 area is cleared on the SPY. This level coincides with 1,335 on the S&P 500 Index (SPX) and is the site of yesterday's high and approximately double the March 2009 low of 666. Swing trading in this environment remains very challenging, and only the best trade setups on individual names should be taken at this point in time.
Another critical area to continue watching is 1.248-1.25 on the euro. Not only is this a key psychological level, it also happens to be the midpoint of the week's highs and lows. Currency markets are notorious for trading very technically, and the fact that this morning's rally stalled right at that area may be concerning for the bulls going forward this week. A retest of the lows is certainly in the cards, and that would weigh heavily upon equity markets.
If you typically don't trade in a short-term environment and are nimble in your trading, it is prudent to maintain a heavy cash position until there is some resolution to this range and pending news. If you are accustomed to trading short-term, be very disciplined in taking your stops, as a new piece of news can quickly blow you out of the water. Stay nimble, and good luck in your trading.
The Case for Big Moves in IWM and QQQ
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