Step Back and Look at the Longer Term

 | Jul 10, 2014 | 12:27 PM EDT
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Sometimes it is good to take a step back. I went more conservative with new purchases yesterday, and I was fortunate they held up this morning. I had already been taken out of most of my trading positions via trailing stops prior to today. Those that were still in the portfolio were pretty much taken out today, unless they were metals-oriented. It's still summertime trading, which I tend to avoid by trading on a much smaller scale. 

If you look at the headlines or watch CNBC, then you might think the market is crashing today. I can't imagine what will happen when we have a 2% or 3% down day. So step back and take a look at the longer-term picture of the SPDR S&P 500 (SPY) to better ascertain where you may want to buy, short or simply watch from the sidelines.

I have been using a weekly chart of the SPY to help my determination on my long-term holdings. There is a very clear trendline of support which we are testing today. The bounce has helped bulls, but we still aren't to the end of the week yet. The remaining action in the week is going to be very telling. A second dip below 70 on the relative strength index (RSI) would have me looking for a possible correction to $188 on the SPY, and I would hedge as such. I might even look to make a ratio type of trade or butterfly on the put side as well, targeting the $188 level and expecting a bounce there.

SPY Weekly

This is a great time to expand your view even further and look at the monthly chart of the SPY. There is a very similar feel to this chart. The long-term bullish channel is still in place with the $190 area as support. This jibes well with the $188 and $195 support levels on the weekly chart. We are so early in the month though, this chart is a little harder to play. It does tell me a $188-$190 downside should be a near-term worst-case scenario. It would take something drastic in my view to push us below those levels. I just don't see it at the moment.

SPY Monthly

I added the Volatility Index (VIX) monthly view here as well. Notice all the spikes on the monthly chart, many of which fade, but the spikes are there. Going back over the last 20 months, there is a large spike where the high for the month is almost double the low for the month, every few months. In the last 20 months, the longest we've gone without one of those spikes is three months. Right now, July would be the third such month without a spike. This seems to indicate that we should expect a push up into the high teens or even into the very low 20s before the end of August. The volatility ETFs are a tough play but might be worth a consideration if we see the VIX retrace to the low 11s.

VIX Monthly

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