No Technical Reason to Short the S&P

 | Aug 25, 2014 | 10:57 AM EDT  | Comments
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Stock quotes in this article:

spy

,

QQQ

,

VXX

"You there. What day is it?"

"Today?"

"Yes, today."

"Why today is S&P 2000 day, sir!"

"2000!" said the bear to himself. "I haven't missed it. The Bullish Spirits have done it all in less than six years. They can do anything they like. Of course they can. Of course they can!"

While my focus may be on the charts, if I am looking at a trade for anything more than a few hours or even a few days, I will take a look at the fundamental picture of a company or the overall markets. I'm just wondering, have the bears, pounding the table short and constantly questioning equities, looked at the charts at all? I mean, even a little bit? Because if you they would take just a moment to look at the slightly-longer-term index charts on the weekly side of the table, they would have been able to see that completely ignoring momentum is the main reason they've had their heads bashed in.

A chart doesn't necessary makes thing easy, nor does it change the fundamental picture in the longer term. Want to scalp short the round number trade? Makes sense to me, but keep timeframe in perspective. What has changed on the SPDR S&P (SPY) weekly chart to make a trader feel anything more than a 2.5%-3.5% pullback is in the cards? It may happen, but if someone can show me technically where they see the reason why we might get a pullback to, say, $175, a 38.2% retracement area, I would love to see it. That's not to say I'm all perma-bulled up at the moment, but beyond the round number trade (shorting S&P 500 at the 2000 level), I simply don't see a technical reason to short. Heck, we aren't even overbought yet. Even worse for the bears, a week or two of sideways movement sets us up for a cup-and-handle pattern with a $208 target.

 

SPDR S&P 500 (SPY)
Source: StockCharts.com

 

If I flip over to the PowerShares QQQ Trust (QQQ), I can finally find a major index, which is heavily overbought. Still, I don't see anything beyond a 2.5% pullback here. It wouldn't change the longer-term price sentiment either. Will anything really matter until the mighty have fallen? In this case, the Qs are the mighty at the moment. I hate chasing highs as much as anyone, or at least most folks, but that doesn't mean I have to short them either without prejudice. Any trade in the SPY or the QQQ here other than a scalp just seems like a trader trying to impose his or her will on the market.

 

PowerShares QQQ Trust (QQQ)
Source: StockCharts.com

 

If we are going to see a big drop in the SPY, would you really be upset shorting at $195 or even $192 to catch the move to $175? Sure, you might miss the move from to $195 from $200, but you could also avoid any further push to say $208. A good example is 2013. Those ignoring the charts and staying stubborn could find themselves down 50% on a SPY short in 20 months. Just let that sink in for a moment -- 50% on an INDEX short.

If things weren't challenging enough for the bears, note the possible head and shoulders forming on the iPath S&P 500 VIX Short-Term Futures ETN (VXX). If this forms over the next 2-3 weeks by seeing price action move to $29.50 from $26.50, then a break lower targets $20. This type of move in the VXX would likely be very bullish for stocks.

 

iPath S&P 500 VIX Short-Term Futures ETN (VXX)
Source: StockCharts.com

 

Overall, I can understand a very-short-term price reversion and round number short on something like the SPY here, but I still don't see the long-term bearish thesis in the face of the current price and momentum structure. A time will come, but why anticipate a trigger just to catch the first 2% or 3% while risking twice as much.

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