How has the S&P500 performed in the past, when it has touched the 150-day and 200-day MA lines?
This chart is just the past year charts, but I encourage you to do your own study over a much longer period.
On the Main box, I showed 3 things:
1. The 50, 100, 150, 200-day MA.
2. The Linear Regression Channel.
3. The Fibonacci Expansion levels.
General Price commentaries
After the big dip in October 2014, S&P500 index continues to edge higher in December, and continues to make higher highs in Feb and May although the increase is getting smaller. Since the start of this year, S&P500 seems to be trading in a sideways range. Just a cursory glance shows that the Bull needs to rest, before making its next move.
The 50, 100, 150, 200-day Moving Averages are getting closer and closer to one another over time (compare today's gaps vs a year ago), suggesting sideways ranges over the past few months. If this pattern continues, soon, prices will no longer respect the Moving Averages ...
Linear Regression Channel (LRC)
This is one of my favourite ad hoc tool. The idea is to filter out noises, and just highlight movements outside this channel. As you can see from above, whenever the price moves near the borders/outside the Channel, it seems to give a good contrarian signal for the trader to act. It doesn't occurs often, in fact it occurs quite rarely, improving the strength of the signal.
The problem with the LRC is that it doesn't tell you how far the fall can be, when it exceeds the bottom of the channel. For example, in October 2014, it fell outside this channel for 1-2 weeks, before getting back into the rising channel. The rising channel validates the longer term Bull trend, together with the slope of the 200-day Moving Average which is also rising.
However, it can be seen that whenever prices fall below the LRC, this would have been a very profitable Buy Signal. If you had bought every time prices falls below the LRC, and held until prices went back into the Channel, you would appear to have a 100% win rate so far, as long as the Market remains in a Bull Market mode. Of course, how long the Trader suffers "pain" is uncertain - that is decided by the Market.
Other Indicators
MACD is gradually narrowing over time, suggesting a sideways action in the past - this is actually a potentially dangerous signal if continues over time, as it suggests that there is a potential for a breakout, whether up or down. We don't know, but yesterday price action suggests serious downside move.
RSI(10) is nearly 30, suggesting an oversold condition.
Slow Stochastics is not yet oversold.
Implied Volatility spiked up, suggesting serious fear. As Implied Volatility spikes don't last forever, this is also an indication that we could be near the climax of the selling, either this week or at most 2 weeks from now (unless markets crashes which is extremely unlikely scenario).
Support & Resistance
Unfortunately, the Bears will need to do a hell of a lot of work to invalidate this Bull Market. For me, even if SPX invalidates the December 2014 low, as long as it is still above the October 2014 low, this is still very likely to be a Bull Market.
Notice that the October 2014 Support sits on the 127.2% Fibonacci Expansion, which itself is an important line. This line is drawn from the 2007 high down to 2009 low, which marks a very important period in the S&P500 last 2 decade history.
More importantly, the 161.8% Fibonacci Expansion sits at 2138, 4 points higher than the High of 2134 so far. Normally, first attempts to break a strong resistance like 2138 should fail (meaning it could break it, but eventually, it will fall back below 2138). This observation can give to trade ideas later on the short side.
For this Bull to be declared Dead, I would need to see SPX violates 1823, or the 200-day MA slope downwards, whichever happens first. As SPX is 2057, it is still 230+ points or more than 11% away, before the Bull Market would be considered Half-Dead / Dead ...
Until the Bull is Truly Dead, we continue to Buy the Dip
The above is just a sample of possible view to analyse the S&P500.
In fact, you could come to similar conclusions using many other Technical Analysis tools.
The specific tool you use doesn't really matter, as long as you know how to use it well under 10 to 20 years of varying market conditions.
How to Capitalize on this?
1. Look to buy outside the Channel, and sell when it goes back inside the Channel.
Where exactly to buy isn't too critical, as long as it is below the Channel. The 200-day MA is as good as any. In general, if the Bull is still intact, lower is better of course.
Where exactly to sell isn't too critical, as long as it is inside the rising Channel. The 50-day MA is as good a target as any, or the latest Pivot Highs downtrend line resistance. Of course, we prefer as high as possible, but markets are not always that accommodative.
Of course, we are not looking for extremely small profit, but as much profit as possible without compromising the very high (100%) win rate.
2. The key is holding power, but with Limited Risk, not unlimited Risk
As we don't know when it will go back into the Rising Channel, we need "holding power".
Unfortunately, the problem with owning ETFs is that it presents unlimited Risk. Markets can do anything, and what we don't want to see if owning a lot of ETF only to see SPX breaks below 1823. Then, the pain is huge, as this can be up to 12% fall. If one is 100% invested in SPY, this is at least 12% loss in capital, with no end of the pain in sight. More pain is possible if the Bull is Dead and the market starts to become a Bear.
Worse of course if you invested in UPRO with 3X leverage. Instead of 12% loss, that would be 36% loss. With instruments like this you will need to apply Stop Loss, but this reduces the win rate from 100% down to something significantly lower - it also open yourself to risk of being stopped out unnecessarily.
3. Consider buying a simple Call Option with limited Risk to avoid getting stopped out unnecessarily.
I don't normally trade with a simple Call Option, but this is one situation where simplicity is not actually that bad, given the extreme move outside the Channel.
One critical benefit of owning a simple call option which you can't get if you own ETF, CFD, Futures is predefined Risk. The most you can ever lose is the entire Option Premiums. Even if the Market falls by another 10%, 20%, etc. The trade-off of course is Theta decay - the stock needs to make a move far enough to offset Theta decay before you see the gain. Given the extreme move (falling outside the channel, and the short term period expected to recover), this is not expected to be a problem.
This of course presumes that you have selected a "safer" Option Strike and Expiry date. Something like 2-3 months to expiry, and a little bit "out-the-money" (OTM) represents a good compromise between higher % reward and cheaper premium (lower risk).
4. Trade consistently, risking the same % of capital each time, never exceeding 3%-5% capital.
The reason is because Market can do Anything. The last thing we want to do is to bet the entire farm, only to find Market has turned to become a Bear.
The goal is to win consistently, so that over the long run, we will have winners.
When we have a system with a very high win rate (here, it is still 100% in a Bull Market), we don't need to risk the farm. Even if the RRR = 1 or 0.5 times, the expectancy should still be very positive, due to the extremely high win rate. However, what could cause the expectancy to become negative is to be stopped out unnecessarily.
Risks
This is not an endeavour to be applied one time only. The goal is to reduce risk by taking all eligible signals over time. The risk is reduced substantially when the number of eligible trades increases over time.
And of course, Markets can do Anything. It could well be that if you have not bought the Dip before, then, your very next time to do so saw the Market turns from a Bull to a Bear - if so, accept the loss and move on.
Conclusion
The above is not meant to be conclusive, but only to illustrate a system that provides signals rarely, but so far, has a 100% win rate in a Bull market (until the Bull turns into a Bear).
For me, until the Bull conclusively turns into a Bear, every dip, as long as the 200-day Moving Average continues to slope upwards, remains a Buy the Dip near / below the bottom of that ever changing Linear Regression Channel.
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