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Will the S&P 500 and Gold Make Up Their Minds Already?


If you don't have an edge in the S&P 500 or gold right now, watch price action while looking for high probability, low-risk setups to emerge.

A lot of eyes were watching the Slovakian Parliament around the closing bell today as they voted on the European Financial Stability Fund (EFSF). The first vote failed to pass the pending legislation, but members of the opposition party have indicated that they will vote for the bill in a second scheduled vote.

The S&P 500 E-Mini futures contract has not sold off sharply on the news, but the trap door risk for equity traders is that the second vote comes up short and the legislation fails unexpectedly. The marketplace is expecting the second vote to pass without issue, and if a different scenario plays out, selling pressure could potentially become extreme. With earnings season now upon us, there is plenty of headline risk to go around and this Slovakian situation just adds more complexity to the news flow.

We have seen the S&P 500 Index rally more than 10% in five trading sessions, which could potentially mean we have more downside work to accomplish before probing higher. The flip side of that argument is that prices continue to rally and push toward key resistance levels overhead. At this point in time, I do not have an edge for a directional trade so I am sitting on the sidelines presently. I do have a few time-decay-based trades in place, but they do not have a directional bias so my book is flat here.

The S&P 500 is a tough buy after a 10% rally in such a short period of time, but the strength and momentum are tough to short. The buyers seem to be higher and the sellers appear to be lower which complicates a potential entry even further. Presently there appears to be two possible scenarios:

Bullish Scenario

The daily chart of the S&P 500 Index is shown below with key overhead resistance levels illustrated on the chart and the potential price action in coming days:

Bearish Scenario

The daily chart of the S&P 500 Index is shown below with key support levels and the potential price action if price works lower:

Overall, I do not have a real edge on the S&P 500 at this point. A pullback makes some sense here, but defined risk metrics and a trading plan must be used to reduce risk. Regardless of the price direction traders are considering, this is a situation where proper position sizing and stop orders can allow a trader to take on a defined risk that he/she is comfortable with.

This market has been tough to trade for several weeks. The price action has been choppy and volatility levels have been elevated since the early part of August. This type of market environment chops up a lot of traders and it sucks bulls and bears into the price action late in the game opening the door for potentially devastating losses if risk is not properly defined.

As an option trader familiar with a variety of spreads, recently I have been utilizing the elevated volatility levels to sell option premium and use the passage of time as a primary profit engine for my open positions. Currently I have three open positions which are all taking advantage of the passage of time as a profit engine.
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No positions in stocks mentioned.
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