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S&P500 - Preparing for 3 Scenarios

The price action in the S&P500 index in the last 2 weeks has made me look silly. I had the theory that price will return below 2000 for further correction. Some reaction from a consolidation resistance gave me more confidence of this theory, but price action shot it down almost immediately after. Instead, price held above 2000 and ended last week tagging 2100.

SP500 Daily Chart 10/25


(click to enlarge)

I was wrong about further bearish correction keeping the SP500 under 2000, but does that mean the market is in bullish continuation? I can definitely see a revisit of the 2137 high or somewhere around that .But I would like to note that volume in the current rally is relatively low compared the volume during the recent bearish correction swings. 

Here's the thing. I am not going to pretend I can predict the future, so let's be prepared for a couple of scenarios, and accept the risk of either missing out, or getting in too early. 

Scenario 1: Runaway bullish continuation 
Scenario 2: Pullback in bullish mode

If the train leaves the station, will you still try to hop on? The risk on one hand is that the market is exhausted by the recent rally, and is STILL in consolidation mode. That would limit the upside and you might end up holding a loser at least for the medium-term. On the other hand, if you wait for a pullback, you risk being stranded by a runaway train. 

I prefer the conservative approach of waiting for a pullback. I would wait for the RSI first to push above 70 to convince me that there is bullish momentum. Then, if price falls back towards 1975-2000 I would start looking for support. More importantly to me, I want to wait until the daily RSI retreats to about 40. Then, if I see it turn back up, I would consider buying again. 

Scenario 3: Staying in consolidation
Now, we can also focus on the possibility that the market is still in consolidation. This will be the antithesis of scenario 1 - the runaway train. Instead, we can focus on the resistance in the 2125-2140 area. From there, we can have a limited bearish outlook to a common support around 2050 and the 2000 psychological level.