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.
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.
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