For those that have been on the long side of the equity markets over the course of the year thus far, congratulations. This Fed-fueled rally we’re currently witnessing has been extremely fruitful for those fortunate enough to have gotten a piece of it – the S&P 500 is up approximately 20% through the first 7 months of the year. Current longs should continue to ride the uptrend in my opinion, perhaps hedging your position with some long puts that could act as some insurance if we do see a significant drop. With the implied volatility levels currently extremely low in the Emini S&P options, traders can buy this “insurance” cheaper than what they normally could.
For those that have missed the move up to this point, my advice is to be patient. Although I believe the market will trade at levels above the current highs, we seem to be coming to a near-term pause in the upward action. These pauses are healthy in bull markets, as the old adage goes, “Nothing goes straight up or straight down.” Take a look at the chart of the Sep Emini futures contract below:
SEP E-MINI S&P 500 FUTURES – DAILY CHART
As you can see, the recent highs are quite extended from the 50-day moving average. Looking at the chart, you can see that the last time we were this far above the 50-day moving average was in May of this year, and at that time we saw the market take a proverbial “breather” and retrace for the next few weeks before eventually resuming the uptrend. Although I do not expect the market to sell-off enough to drop over 50 points below the 50-day moving average as it did during the last retracement, I do think that we are at a point where the market seems to want to consolidate before moving higher.
So, at what level should traders currently on the sidelines consider getting long? Taking a look at the chart, you can see the 50-day moving average happens to converge between the 38.2% and 50.0% fibonacci retracement levels of this most current leg up. I believe that there is a decent probability that the market could trade this 1645 – 1630 level over the next couple of weeks and, if it does, provide those traders that have missed the big move up an opportunity to potentially capitalize on the next leg of this bull market should we continue higher into the last months of the year.
Good traders miss big moves from time to time, and that’s OK. What you don’t see good traders doing very often is chasing a big move that’s already happened. Showing some patience and taking a disciplined approach to where you enter markets can make a dramatic impact on your bottom line P & L at the end of the year. Don’t be the last one in the pool!
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