(ES) S&P, Russell Pops First Approached as Corrective, But Put Diagonal Covered

Technicals, May 25, 2012; 6:55am

Overnight's S&P pop above Tue's 1326.50 high and our short-term risk parameter detailed in the 240-min chart below confirms the very short-term trend as up. Within the context of the past couple months' broader peak/reversal threaten however, we advise traders to first approach this recovery as another corrective selling opportunity. For shorter-term traders with tighter risk profiles however, as well as for holders of the May week2 1380 / Jun 1295 put diagonal spread, we have advised taking profits and stepping aside temporarily from a bearish policy in order to circumvent the heights unknown of a correction or reversal higher.

The put diagonal portion of the put/call diagonal combo recommended in 03-May's Trading Strategies Blog was originally established at a cost of "even". The resulting short futures position from, in effect, the 1376 level (1380 strike - 4.00 premium) was covered this morning at 1327 for a $2,450 gain on a 1-lot position. The original short Jun 1295 put from 4.00 was covered this morning at 12.25 for a $400 loss, netting a little over $2,000 profit for the trade. We'd like to remind traders that this cautious strategy was established a day before the vaunted nonfarm payroll report. Given all the key financial and agricultural reports released throughout the month, these types of low-risk / high-potential payout opportunities are presented often, and we encourage customers to contact their RJO representatives for assistance in putting them on just before key reports.

While the very short-term trend is up as discussed above, relative to the scope of the past couple months' broader developing downtrend it would be premature to consider this pop as anything but corrective. Indeed, the market is only now closing in on the Fibonacci minimum (1333) 38.2% retrace of May's 1412 - 1287 portion of the decline and resides well below the 1352-area of support that, since broken, is considered new key resistance.

On this broader scale, we still believe that strength above 11-May's 1364 larger-degree risk parameter is required to threaten a broader bearish count, expose the Mar-May sell-off attempt as a 3-wave and thus corrective affair, and resurrect the long-term advance. In lieu of such strength and on this larger-degree scale, traders are advised to approach this recovery as a corrective selling opportunity with a failure below Wed's 1294 low and short-term risk parameter needed to render this week's recovery a 3-wave and thus corrective affair consistent with our broader bearish count.

From a very long-term perspective, it is interesting to note that thus far, the market has rejected the exact 1289-area that provided major resistance last Oct and that now must be acknowledged as a new support candidate. As a result of this fact, we don't want to underestimate this market's ability to recover following today's short-term proof of strength. But by the same token, this week's pop has to also be acknowledged as being of too small a scale thus far to conclude a broader reversal higher.

In sum, shorter-term traders with tighter risk profiles have been advised to pare or neutralize their bearish exposure as a result of today's proof of short-term strength above 1327. An important by-product of this recovery is the definition of Wed's 1294 low and short-term risk parameter, the break below which will render this week's recovery attempt a 3-wave and thus corrective affair consistent with the broader developing bear trend that could then expose significant losses thereafter. A bearish policy remains advised for longer-term traders with strength above 1364 required to take defensive measures as the long-term bull trend may be re-exposed at that point.

The technical analysis of the Mini-Russell 2000 market is virtually identical to that just detailed above for the E-Mini S&P market, with overnight's break above Tue's 7689 high confirming the very short-term trend as up and Wed's 7459 low the new key short-term risk parameter the market needs to fail below to render the recovery from 7423 a 3-wave and thus corrective structure consistent with a broader bear trend.

From a longer-term perspective shown in the daily log chart below, we believe strength above 11-May's 7947 corrective high is needed to expose Mar-May's sell-off attempt as a 3-wave and thus corrective affair consistent with the long-term advance.

On a very long-term weekly log scale chart below, it's interesting to note that while the Russell broke below last Oct's 7684-area resistance-turned-support, it pretty much stopped on a dime at the (7430) 38.2% retrace of the entire Oct'11 - Mar'12 rally from 5971 to 85.06. Combined with today's bullish divergence in short-term momentum, we just don't want to underestimate the extent to which this market may correct or reverse higher. But by the same token, today's minor-degree strength is grossly insufficient to conclude a broader reversal higher.

< Back to all articles



Tweet