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The S&P 500: Breakout or Shakeout?


Bears cling to the notion of a potential double top.

Editor's Note: Todd posts his vibes in real time each day on our Buzz & Banter.

It's Groundhog Day in the financial markets as we walk into green arrows throughout Europe (sans Spain) and Asia. Closer to home, with earnings painting the tape (United Parcel Service (NYSE:UPS) and Exxon Mobil (NYSE:XOM) were decent, 3M (NYSE:MMM) missed) and jobless claims (which came in slightly better than expected), stateside futures are indicated higher as I scribe this pre-market vibe.

With the S&P (INDEXSP:.INX) having edged through three different technical resistance levels-the back-test of the uptrend since November, the downtrend since April 11 interim top, and the right shoulder of a pattern that (would have) worked to S&P 1480 (IF S&P 1540 was breached)-the bears are clinging to the notion of a potential double top (should S&P 1600 contain the euphoria).

Perhaps they should chew through their cognitive biases as a cautionary tale; the price action since April 18, when the tape briefly breached S&P 1540-was that really only a week ago?-has been nothing short of impressive. My trading performance has paradoxically mirrored that move, as discussed yesterday. After covering up meaty gains and flattening my pad on that first test of S&P 1540, I opted to layer into additional short exposure and adjust my stops higher.

In hindsight, I can add one more misstep to the discussion started yesterday. I jumped the gun on re-initiating my risk after a stellar streak and a smart cover; as old school folks will attest, I have a habit of being early on my entry and premature in my evacuation. After catching a sharp 3.5% move, I didn't want to miss the bigger bust, and that's a cardinal sin.

The "fear of missing" is one of the most destructive emotions in the marketplace, and we know that emotion is the enemy when trading.

There is no putting lipstick on this pig; regardless of where we go from here, the mechanics of my swing were rusty at best. I got too big, too early, whereas if I demonstrated proactive patience and initiated risk in and around these levels-S&P 1580 has been circled for many moons-I could have traded around my exposure with a clearer head while playing offense, rather than defense.

There is tiered resistance up to S&P 1610 but I will cover up some of my short exposure with a measured move through S&P 1585, if and when, as a function of my long lost friend, discipline.

There's no hiding in the 'Ville-we don't brush our mistakes under the rug, we attempt to learn from them, however painful they may be at times. As always, I plan to wait for the first half hour of noise to pass before making any directional decisions.

The Learning Curve

Each year, I like to share an article, Things I've Learned, which helps me keep things in perspective.

As I settled into my turret yesterday following a full day of pre-op prep, I borrowed that format in real-time on the Buzz & Banter (click here for a free trial!). The following observations were offered in no particular order:
  • I beat myself up pretty bad for giving back a fair chunk of my year; today (read: yesterday) while waiting for one of my docs, I flipped that switch. Instead of thinking about what I've lost, I thought about my YTD gains, as well as my current positioning as we toggle near S&P 1580.
  • Again, if I entered the session flat, I would be fading (read: shorting) this tape with a stop above. Then again, if wishes were knishes, I would weight 300 pounds.
  • Through objective eyes, they've thrown a LOT at this tape (including weak durable goods orders) and it didn't get hit. As a wise man once said, the reaction to news is always more important than the news itself.
  • Earnings (on the aggregate) have been fine on the top line, but they've left much to be desired from a revenue standpoint (read: cost-cutting measures helped corporate America).
  • It feels like the bulls have some pep in their step right before the "Sell in May and Go Away" time horizon arrives. We posited that in 2011 and it paid off in spades.
  • If you had the Mott's to sell Apple (NASDAQ:AAPL) strangle or straddles into earnings, you were the real winner; premiums got crushed like school-girl affections.
  • In terms of my forward schedule, I'll be locked to my turret today, tomorrow, and Monday before finally getting my hip flipped on Tuesday. I'm told that I should expect to be in the hospital the rest of next week but that didn't stop me from trading (and writing) last May and I'm approaching this milestone with the same mindset. Quite hopefully, we'll have the same results.
  • Many thanks, and have a GREAT day!

Twitter: @todd_harrison

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Position in SPY.
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