[Note: this article was edited at 13:23 CST on 02/15/15 to correct our if/then line. Our if/then line is the daily close on 02/12/15, not the daily close on 02/13/15. This is an important distinction that we find imperative to clarify. We will swiftly change to a short position with a daily close below 2088.48.]
Over the past three months, the S&P 500 has gone sideways. That is until today, when this major U.S. equity index closed at a new all-time-high. With new highs, comes new opportunity. Those readers familiar with our approach understand that we preach price. Price is the manifestation of opinion and final arbiter of value. You can have the all the strong opinions and indicators you want, but the only thing that matters is price. And since 2011, the S&P 500 has moved upward in a well-defined channel (see green trendlines in chart below). Moving in a series of higher highs and higher lows, price has guided our investment approach. As long as price behaves this way, we remain long this market. The exception being back in mid-October 2014 when we backed away from the market until price proved we could be long again on October 21st.
If price is the most important piece of evidence in identifying opportunities, then risk management is the most important part of taking advantage of those opportunities. From a risk management perspective, technical analysis is ideal for identifying when any trade thesis is wrong. Knowing when you’re wrong or knowing when to exit is crucial to successful trading. Every trade we enter has to have an entry and exit plan. In the chart below, we’ve identified some important levels. If we are going to establish a long position in the S&P 500 using the ETF, SPY, we need to know where to enter, when we’re wrong, and when to exit. The same is true for taking a short position (using ETF, SH). Today’s new all-time-high provides a well defined opportunity. We remain long this market, but will swiftly change to a short position with a close below yesterday’s today’s close of 2088.48 2096.99. That is our if/then line. Long above 2088.48 2096.99. Short below it. As time moves forward, we’ll reassess our game plan to minimize loss and maximize gain. This game plan is not for everyone. We’re not saying being long or going short is right for you.
We like this breakout in the S&P 500, but we will be watching price action closely as none of the concerns we’ve identified over the past 3 months (see our seven part series) have been alleviated. More coming on that soon.
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[…] We indicated back in February that in regards to the S&P500, we would be long above 2088.48, short below it. Investors could have taken advantage of this situation by shorting the S&P 500 using an ETF such as SH and/or (we like doing both) going long VIX using ETFs such as TVIX and UVXY (both up 20% since the breakout). At this point, when you look at the chart above, the S&P 500 is right at the edge of our shaded resistance and up against a 61.8% Fibonacci retracement (in purple). In addition, VIX is up near several points of resistance (not shown), including the upper edge of a downward channel and at 38.2% retracement. Accordingly, we’re closing our long VIX trade and watching the S&P 500 price action closely. We expect the S&P 500 to bounce a bit here and we’d reestablish a long S&P 500 position if/when new highs are made with a close above 2117 on the index. On the other hand, if VIX breaks up from the downward channel, we’ll consider jumping back into the VIX long trade. […]