Weekly Market Forecast for February 28th, 2016
Last week we prepared for a down move in the S&P 500 if it crossed below 1892. However, the week started on a strong note on Monday, which promptly failed by Wednesday morning and we were back to a weekly low. From there, we had a sudden reversal as markets rocketed higher on general optimism that the G20 Meeting in China would publish a collective statement of global stimulus and more accommodating policy. Add into the mix once canceled and one delayed POMO’s (Permanent Open Market Operations) and you have the makings of a panic buying frenzy.
This buying frenzy continued right up to 1971 on Friday at 6 AM ET, when the big money came back in and started selling into the rally and closing the index on a very bearish candle, called a shooting star.
So where do we go from here?
The major goal of this entire week-long rally was to close above the resistance line, which was previously supported from 2009. This is the black line on all the charts below. This did not happen.
In addition, here are some more bearish factors which suggest it’s time for a down move:
- Price action is failing in our TRADEPRO Red Box, which also happened on February 1st, and price slid over 6.5% right after
- Price may have formed a higher high, but the rally was accompanied by lower volume than the 9-day average
- The failure to close above the 1955 resistance on strong volume is a sign that the selling pressure will resume
- The 100 moving average smacked price down on Friday (bottom right chart, the red line is the 100-day price average)
- Momentum has created a triple top and looks ready for sellers to take control
- RSI has also turned near the 70 levels, indicating slightly over-bought conditions
- Stochastics entered the overbought zone as well, but they tend to be able to hang out there for a while
- MACD is right at the zero line, a perfect retracement before the plunge continues
When a price is pinned against such strong resistance, we can almost certainly expect to see a fight, with some choppy price action. The bulls or bears will not back off from here without a fight. The stage is set for Monday.
I will warn, that although I am bearish for the medium term, we can still see some upward movement to start the week, so be prepared to wait out a move against you. The only way to prepare for that is to trade smaller positions.
On a weekly scope:
- We have the perfect support line break (black line) and move back up to test it as resistance. This type of move preceded a lot of bear markets in the past (2008, 2001, 1993).
- These two up weeks were much needed to reset the sellers and shake out the newcomers
- Price action is forming lower lows, and lower highs – indicative of a bear trend
- Momentum is bearish, but showing slight signs of divergence (moderately bullish sign for the short term)
- Bollinger bands (top right) have clearly expanded in favor of the downtrend
- Price has bounced off the 200-day moving average (bottom right, green line), which is necessary for a proper reset before we get ready to challenge that level once more at the 1810 mark. If this gives and we break below, we are headed down to 1610 (sounds crazy I know, but trust me, I’m being sincere)
Weekly Options Trade
This week we will enter into the sell-off when the price drops below 1933!
We will trade this move using the SPY ETF that mirrors the S&P500 index (options are cheaper and you need less capital to trade this strategy).
- Purchase the March 11th 196 put for approx $325
- Sell the March 11th 191 put for approx $141
- Total cost = $325 – $141 = $184 (that’s all the money it takes to trade one contract!)
Total profit = ( 196 – 191 ) * 100 – $184 = $316 profit
That is $316 / $184 = $1.7 reward for each $1 risked. An acceptable ratio for such a high probability trade.
Please note that by the time the index drops to 1933, this spread will likely cost more money, possibly closer to the $210 mark, but this would still yield a $280 profit.
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Oil Price is Still King
There is a very high degree of correlation between oil and the equity market in the US. With oil prices rebounding the past two weeks as well, we are also ready for a potential down move in the upcoming week.
- Price action also formed a shooting star on Friday, in addition, it was an inside day (reversal candle)
- Price action has failed to close above the 50-day moving average a grand total of the last 5 consecutive days, even though it made a clear run for it 4 of those 5 days
- Momentum has rolled over bearish once again (after rallying from a bullish divergence)
- We needed the run-up we got from the $26 low, because EVERYONE was on the short side, and everyone cannot win.
|Sun Feb 28|
|Mon Feb 29|
|TueMar 1||8:30 am||CAD||GDP m/m||0.1%||0.3%|
|10:00 am||USD||ISM Manufacturing PMI||48.5||48.2|
|Wed Mar 2||8:15 am||USD||ADP Non-Farm Employment Change||185K||205K|
|10:30 am||USD||Crude Oil Inventories||3.5M|
|Thu Mar 3||8:30 am||USD||Unemployment Claims||271K||272K|
|10:00 am||USD||ISM Non-Manufacturing PMI||49.8||53.5|
|FriMar 4||8:30 am||CAD||Trade Balance||-1.0B||-0.6B|
|USD||Average Hourly Earnings m/m||0.2%||0.5%|
|USD||Non-Farm Employment Change||195K||151K|
|Sat Mar 5|
That is all, have an awesome week to all my TRADEPROs. It will be a good one!
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The information contained in this post is solely for educational purposes and does not constitute investment advice. The risk of trading in securities markets can be substantial. You should carefully consider if engaging in such activity is suitable for your own financial situation. TRADEPRO Academy is not responsible for any liabilities arising as a result of your market involvement or individual trade activities.