Going into the end of last year the market saw a strong reversal back down to long term support levels. S&P went down to monthly support, and for a second looked as if it would continue to tumble. However, going into the last few days of December, the market started to bounce and confirmed support would continue to hold. At the start of 2019 we continued to show strength and have now seen a bounce to bring us close to our all time highs.
For traders who only follow the news, they would contribute part of this bounce to be from the Feds turning from a hawkish to dovish view. At the start of the year, the Fed’s decided to hold back on the several interest rate hikes they were looking to implement this year, and leaned towards not putting on any. With a global slowdown looming in investors minds, this news was euphoric and caused them to jump back into the market.
If you had been a trader trying to chase this move, then you may have been late to the game, or paying more than you would have preferred to take in some profits. However, if you were looking at your technicals, then you were getting early clues from your chart.
Take a look at the monthly chart below.
Notice each time we have tested the ATR Trailing stop as support. This is highlighted by the red boxes on the chart. Each time the price has maintained that support level, the price would bounce back up and go into an overall bullish trend once again. When there was confirmation of holding that level going into the end of 2018 and the start of 2019, that would have been an excellent entry point to go long or to add on some Put Credit Spreads. This is why the news can be something to be mindful of, but often times I find it to be a catalyst for what the technicals on the charts are already showing us. The technicals told us if that level held we would continue higher to at least test the prior highs.
Now you may be saying to yourself, this is great in hindsight, but what should I look for now? Once again look back to your charts. The last two times we have seen this type of move back in 2011 and 2016, the market saw an immediate bounce back up, but would then enter into some choppy consolidation as it retested those highs before ultimately continuing in a bullish trend. This is shown in the purple boxes on the chart.
Currently the price has yet to reach the all time highs, but if history repeats itself we know the probability of that happening is high. We also know that on our way to test that level, and even after we hit it, the price could continue in a choppy range before moving back up. What this tells me is longer term, I can expect the all time highs to be tested again, but I also need to understand it could take a few months to do this. This will lead me to be a bit more nimble with my trades, to take profits when I see them, and manage when the trade moves against me.
With this chart setup I will keep my risk in mind and look at more spreads over long calls and puts to reduce capital risk while I trade this choppy range. It also means I will be keeping my eyes peeled for the moment the monthly breaks out of the chop and goes back into a trend. Once that happens I can look to add a few long calls further out in time and just play the pattern to the upside.