SP500 Set Up for a Wild Monday and First Week of New Year 2010 ?

The charts are saying that this first week of the new year 2010 has the potential to be quite a volatile week.  I am considering the possibility at least that we finally get a meaningful hard down week this first week of January or at least start to see a lot more volatility as compared to last month.

The bollinger bands on the SP500 have contracted into a very narrow band over the last month but they have started to slightly expand.  I suspect that the volatility expansion is going to be to the down side, but a lot really depends on how we close Monday, the first trading day of the new year 2010.

Looking at the uptrend line that has defined this bull run since March 2009 we do see that the SP500 is once again sitting on this uptrend line and at risk of breaking down and through it. 

sp5002010103

Within the last two months the SP500 has skipped along this uptrend line 3 times.  Many times you will see prices break through a trendline successfully on the third try.

The weekly MACD is once again in a bearish downside crossover stance, but we really need to see a hard down weekly close this week to confirm its bearish implications.

The yellow shaded area in the chart above depicts that slow narrow trading range that was on very weak volume.  If we are able to break down this week below the red dotted horizontal line with some conviction and maybe even close under this yellow shaded trading range it would go a long way towards solidifying a longer term trend change.

A close below the trading range would engulf all of those buyers and put them in a losing position.  Ideally such a decline below this trading range would be on very heavy volume to help confirm the trend change.

Closing significantly below the red dotted horizontal line on the chart would also set up a 2B sell signal which can always have the potential to be very powerful sell signals and trend changes in the market.

If I am wrong, then the first clue will be a very strong upward close Monday the first trading day of year, that puts more ‘air’ between price and the uptrend line, reestablishing the strength of the uptrend.

This market has had the characteristic of evading almost every single possible bearish outcome for months on end.  So I think it is still prudent to be aware of that no matter how ‘high’ the market seems to be.

But the risk reward at this juncture (for the short side) seems compelling to me.

I went fully long the TZA Triple Bear Russell 2000 ETF 30 minutes before the weekly close last week at an entry price of 9.50.  The stop is at 9.28, so the downside risk is 2.31%. 

If the market somehow manages to test the highs again then obviously I will be stopped out, but I think the real key is how we close the week.  If I am stopped out very early this week I may try to re enter later in the week depending on what the tape is telling me.

Lets see how this week pans out.  If nothing else I am hoping we see larger ranges and a lot more volatility because the action at least with respect to the indices has been about as exciting as watching grass grow in recent weeks.

Posted in Index Trading, Market Timing, SP500
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