The Trader Daily

 | May 22, 2014 | 7:30 AM EDT  | Comments
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Stock quotes in this article:

vix.x

,

spy

,

petm

,

mos

As revealed in The May 14 edition of Trader Daily, I am not a devoted follower of the CBOE Volatility Index (VIX). That said, it would be foolish to turn a blind eye to the index, as it's registering sub-12.25 levels. My interpretation of these low readings is that any intraday upside in the SPDR S&P 500 (SPY) and E-Mini S&P 500 Futures Contract, or even multi-day upside, is unlikely to be sustained. In light of this, I would advise extreme caution on the part of momentum traders addicted to chasing price -- in this case, higher. 

The bottom line is this: Long-biased index traders would be wise to either sit on their hands until sentiment has bounced from this extremely low level of complacency, or they should utilize far smaller-than-normal position sizes. More aggressive traders should consider stalking the E-mini S&P 500 and SPY for short selling or spread trading opportunities, especially in the event that prices move dramatically higher during the early part of a given trading session.

Daily Chart of the S&P Volatility Index with SPY
Source: eSignal

Thursday's SPY trade plan is moderately complicated, but that's simply because, while price action favors buyers, my inclination is to aggressively stalk the short side on any further strength.

Wednesday's regular session ended on a bullish note -- and, barring an unforeseen slide in the Asian or European markets, my current expectation is for Thursday's open to be dominated by buyers. The bottom line is that all SPY trading above $188.65 would keep dip buyers actively engaged in this market, and would encourage day time frame buyers to push through $189.20 and bid prices up toward $189.60.

How I position myself during the early part of Thursday's session will be a function of where the market looks to open. Because I believe all trading above $188.65 is bullish, any sort of bearish (lower) gap toward that area would have me looking long. If the SPY were to gap beneath $188.65 and fail to immediate recapture said level, I'd expect a complete unraveling of Wednesday's strength. Put another way, I'd view long positions as being generally risky if trade is sustained beneath $188.65.

My plan to stalk a short trade would comes to fruition if the ETF traded through $189.20 and began approaching $189.60. That latter level represents the fairest price to conduct business between May 12 and May 14, so I want to use any sign of weakness near that level as an indication that prices are being rejected, and that they are likely to slide back down toward $189.20. Should demand build near $189.20 and prevent the price from slipping through that level, short sellers would be wise to reduce their expectations and associated risk. If, however, the SPY were to slide back through $189.20 after testing levels near $189.60, I'd be on the lookout for a complete reversal and a trade back down toward $188.65.

S&P 500 -- 30-Minute Volume
Source: eSignal

Additional Notes:

1. On May 7, I introduced PetSmart (PETM) as an intriguing higher-time-frame short idea. As a reminder, we were primarily concerned with the developing head-and-shoulders top and massive negative divergence in the relative-strength index (both observed on a monthly chart). If anyone got involved in the name back then, well done and good luck going forward. If, however, you were like me and failed to jump the gun, we are now forced to step aside and await a more risk-appropriate entry. In my view, a backtest of the now-shattered neckline (roughly at $62.50) would offer a second chance at a short trade.

2. A new long idea on my radar is Mosaic (MOS). This stock has formed an incredibly tight triangle (consolidation) pattern over the past 10 weeks, and in my view, a push above $50 on decent volume -- 3 million shares or higher would be sufficient -- should attract momentum players back to the name. Depending on one's risk tolerance, a stop of either $48, beneath the early-May swing low, or $46.50, beneath the 200 day simple moving average and mid-April swing low, would seem logical.

Any trading- or volume-profile-related questions can be posted in the comments section below, emailed to me at parkcityyeti@gmail.com or posted to my twitter feed @ByrneRWS

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