Big Picture Review

Just about any study of trading emphazises the importance of protecting yourself against faulty setups. I see a possible 2B reversal materializing on the S&P. The reveral of course is from the latest downtrend in the upper leg of the rally that started in March. I address that downtrend in my earlier posts. Yesterdays action suggests the possibility of a bear trap and in these cases, we have to determine how much risk exists in rally continuation and how to best position for the next setup.

For the benefit of those who are not familiar with a 2B reversal, it is the case when we see the prior local low is violated after the last local high. This is the first signal of trend change. Subsequent to setting the new local low, a failure to break the last local high occurs. Action then pushes to a new local low after this first attack. If the next attack at the new high breaks the upper price trend line, you have your first alarm and possible break-out. I think that is what happened yesterday and we see it in the futures this morning.

So with this in mind, we may have a breakout and we need to know what the worse case scenario could be. To do this, I offer the following big picture chart - which is a weekly view of the S&P from last high to March low:



Sadly, we can not discount the "technical possibility" of a run to 1120. That is a fairly substantion leg up from here and if you are short now I would be very careful to guard against a breakout above 1018. I will use a decisive break and close above 1013 as my next signal to adjust my shorts and flip long. Of course we have to be careful of whipsaws and failed breakouts...

Trading is a risky business, but if we let our positions become "part of our family" we are bound to be punished.