SPX Completing Third Shoulder

Follow Up: Beware of Head & Shoulders

By Bryan Bottarelli
Thursday, July 02, 2009 9:44 AM EDT
Thu, 2 Jul 2009 13:44:00 GMT

Dear Bottarelli Research Member,

Good morning. On Tuesday, June 30th, I wrote, “Leading into a 3-day holiday weekend, I would expect most floor traders to finalize their positions today or tomorrow – and then start the weekend early. As part of this finalization process, I can’t imagine that anyone would enter into a long position over an extended weekend. Therefore, we could very well see some profit-taking starting today or tomorrow. Therefore, let’s continue holding our SDS August 57 Calls (SDS HE).”

As the markets open this morning, the U.S. unemployment rate ticked up to 9.5%. June non-farm payrolls totaled 467,000, which was much more than the 325,000 that had been forecasted. As a result, the markets are sharply lower. That means we’re seeing something that we haven’t seen in quite a while. And that is, markets that are actually selling off on bad news.

Lately, we’ve seen the markets rally when a bad economic figure was not as bad as expected (which has been coined the “green shoots” recovery theory). That’s certainly not the case today. To be perfectly honest with you, I haven’t heard anyone utter the phrase “green shoots” in over a week. Perhaps the upside catalyst associated with that thinking process has come to an end?

Whatever the case, I’d like to maintain our diversified mix of three August-based positions. The ABX August 35 Calls (ABX HG) that we entered yesterday for $2.10 traded up to $2.50 yesterday, but have dipped back down this morning. The TLT August 95 Puts (ILT TQ) that we entered for $3.50 also ticked up to $3.90 yesterday before falling back down this morning as well. Going forward, maintain both positions.

When it comes to our SDS August 57 Calls (SDS HE), we entered this play on June 25th for $4.89, and with today’s downside move they’ve now ticked up to $4.40. If the selling pressure escalates, we should move back into the profit zone. And just to follow up on the head-and-ahoulders formation I identified on the SPX, today’s downside push could be completing the third shoulder. If the SPX moves below 900, and the 200-day moving average at 875 does not hold as a support level, then look out below.

SPX

As always, I’ll continue to monitor the entire situation for you. But until then…

Lock and load!

Sincerely,

Bryan Bottarelli

Bryan Bottarelli
Editor, Bottarelli Research

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