Slow Week Ahead

I don't expect too much excitement in the markets this week. US markets will be closed this coming Friday in observance of the Christmas holiday.

This morning markets are gapping up a little bit. The S&P 500, the Dow and the Russell 2000 futures are all trading at new highs. Asian stocks traded lower over night and Euro stocks are currently showing strength. No major news in the markets until Wednesday.

Levels to watch today on the ES:
resistance above at: 1244.50, 1246 and 1248
support below at: 1240, 1234 and 1230

I like shorts anywhere above 1244. 1246-1248 looks even better to enter short, if the ES trades that high. I like buying the market between 1230 and 1234 on the ES.

Market Outlook This Morning

Yesterday the S&P 500 traded down to the 200 period moving average (1227.50 on the 60 min chart) for the first time in 12 days. We quickly saw buying come into the market and the ES closed the day up more than 10 points off the low. The current rally (and up-trend pattern) that began on December 1st, has not yet broken down technically, so there is no reason to be bearish... yet. That being said, I remain confident that a short-term market top is in formation. I expect to see continued up and down action for the remainder of 2010 with the formation of new highs still likely. We may have to wait till the new year before seeing the market correction I anticipate. My strategy for today and the coming week is to short new highs and buy dips.

For this morning, I am bullish, though trading action may be light and possibly boring. Asian stocks closed around the flat-line and European stocks have been quiet. I expect the ES to test the highs of 1242 with potential to trade up to 1246-1247. I will look to get long when the ES trades down around 1235-1236.

If I enter any trades, I will post them in the comments...

Market Looking Relatively Strong to Begin Trading

Market relatively strong after positive retail sales data and an increase in PPI (though the increase in PPI was mainly due to a rise in gasoline prices). The only real negative news this morning, which resulted in some selling early, was Best Buy (BBY) missing on earnings expectations.

The level I'll be watching this morning is 1230 on the ES. I expect support to hold and I will be a buyer in the 1230 to 1233 range. However, if 1230 doesn't hold, that will change my outlook. I will not defend a long entry below 1230. What I do expect is a move to retest the highs and most likely a pierce to a new high. I will short the first sign of resistance after making a new high. 1243 on the ES looks like a good resistance (short entry) level as of now.

Selling Into the Close Is Not Confirmation That the Top Is In

The close today was negative, however, it is not negative enough to confirm that the correction has begun. All that the S&P 500 did, was trade back down around Friday's closing price. The close also happened to be right at the bottom of a 4 day up-trend channel. We need to see further selling come in to get closer to a confirmation that a short-term top is in and that the correction has begun. A gap down to start tomorrow's trading session will be a step in the right direction. A subsequent lower close tomorrow will be a good sign that the correction has likely begun.

China Does Not Raise Interest Rates

It had been expected that China would increase interest rates to curb growing inflation as indicated by a 5.1% CPI, however, no such rate hikes were implemented over the weekend. As a result of the non-action, the Shanghai Index soared up almost 3% and equities around the world are looking strong.

Amidst this news, and the fact that the up-trend is still intact in US markets, there is no indication the market has topped yet, so it is still early to be short this market. Any shorts now are best as day trades. If you do insist on starting a swing short position ahead of a confirming signal, just make sure you have some hedge to the long side.

Gold, Dollar and the S&P

Looking at Gold and the Dollar as compared to the S&P 500, you could make an argument to support that the market is making a possible top right now.

Gold made a high on December 7th and has since traded down a bit into a possible bear flag formation. You could argue that if the markets are following Gold's lead and gold is about to make a further push down, then this new high on the S&P could mark the beginning of a reversal down. Also, if you look at the dollar, it made a high on November 30th. This coincides with the beginning of the current short term rally in equities. The dollar has since traded down to its most recent higher low on December 5th and has since been making higher lows. You could argue that the dollar will continue up since it found support at the 20 MA on the daily chart on December 5th. For this you could also argue that equities will trade down in concert with the upward trend on the US dollar.

What is also significant is that the average number of daily gainers versus daily losers in stocks is trending down amidst this current rally, another sign that the rally is coming to a short term end.

These are all reasons to allow you to speculate a top is forming. However, if you prefer, you can wait for confirmation that the current up-trend is broken before going short. To do that wait for consecutive candle closes below the upward trending 8 and 20 period moving averages; on the ES, you would want to wait for confirmation below 1231-1232 intra-day and/or below 1217-1218 on the daily chart...

How Much Higher Can We Go?

The market continues to be in Bull mode, however, that doesn't mean it will continue up. We have essentially been consolidating for the past six trading days while making slightly higher highs in the process. The obvious thing to note, though, is that the new highs are met by selling every time. This trading behavior that appears to be bullish consolidation, is trade that happens to occur in a resistance zone dating back to the 2008 lows. There is still potential to make higher highs, but that upward potential is limited as we will likely see a correction in the near term.

We have been seeing some good news of late including high consumer sentiment numbers as well as a decrease in unemployment claims. This good news coming at new two year highs in the market could be just the type of deceptive info that could make this a good time to sell.

How much can we correct?

I have a couple of key levels on the ES to look at and I will list them as targets to the downside:

Target 1: 1194-1197
Target 2: 1182-1183
Target 3: 1155-1160

Target 3 may be less likely, but if you trade multiple contracts, you can attempt to scale out of your position at each target, letting the last (1/3 position) ride in case the ES continues down lower than targets 1 and 2.

The key is determining where to enter the short position. I wouldn't argue with entering a short now in the current range between 1230 and 1233. Just be aware that there is further upside potential. That being said, I don't expect the ES can trade higher than 1240-1245 without correcting.

Take precaution. When shorting into a bullish market trend, it is important to consider hedging your trades. One way I like to hedge my short bets, is to take scalp trades (in a separate account) to the long side on each down-tick into support.

So, to recap, I expect a downward correction anywhere from 40 to 75 points. It is possible that this correction does not happen until after the new year, but I expect it sooner. After the down move, look for the bull market to continue and expect new highs into 2011...

ES Approaching Key Resistance Ahead of Employment Data

Market at overbought levels just ahead of the employment numbers. Key resistance looms overhead which is setting up a great short opportunity.

1228-1229 represents key resistance on the ES. I will be looking for a short opportunity at this level. If this trade works in my favor, I will be looking for 20-30 points. Be careful defending any short entries in what is an extremely bullish market.

I will post my trade in the comments if/when I take it.

S&P 500 Futures Up More Than 20 Points Overnight

In the overnight session, the ES has already traded up an average daily range and is now hitting some solid resistance at the top of the 12 day trading range between 1170 and 1200. I couldn't argue with taking a short entry anywhere between 1196 and 1200. The best bet would probably be to wait till market open and see if we get a little buying surge upward to open trading. That would be a good opportunity to start your entry by fading that move. Even if the trade goes against you, the probability is extremely high that it will come back down to let you get out for break-even at the very least. If the short works out, it should be good for anywhere between 10-15 points; potential target is 1083 (ES). Be careful defending any shorts above 1200...

Keep in mind, that although the current action feels very bullish, we are still stuck in the 1170-1200 range on the ES until we get consecutive daily closes back above the 1200 price point and again beyond the 1207 April highs. Until that happens, I continue to expect a lower low down below 1160...

Levels to watch today on the ES:

Resistance above at 1197-1199, 1205-1207
Support below at 1192, 1187-1188, 1181-1183,