All Bid Up and Nowhere to Go (almost)

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Before I get into the Trade Idea, I’m going to review the context of the S&P500 from a structural standpoint and a typical deviation standpoint. First of all, structurally, the Weekly and Daily charts show higher highs and higher lows, the very definition of an uptrend. In November of 2016, the SPY completed a $20 wide trading channel of which currently price is a stone’s throw from its high resistance. The channel would suggest that buying potential is limited.

Now, anyone who hangs around the comments has seen that I use 5% simple moving average envelopes around a 100MA as a measure of movement potential (oversold, neutral, overbought). Where are we now? Yep, hit it on Friday. Again.  (Click on any chart to see a larger version).

170211 - 2year 100MA Deviation

But maybe 2 years is not enough? Let’s take a look at 14 years and two bull markets then. You’ll notice that after the volatility of the bear market and the initial thrust out of the bear market bottom, price eventually settles pretty well into these 5% bands.

While I’ve got your attention on this chart, take a look at the long-term channel from 2004 through 2007. That channel contained and pretty well textbook called the end of the bull market with 1. a channel breakdown, 2. a channel retest, and then the confirming move to 3. to make a new low and issue in the bear market which seems amazingly brief now from this viewpoint.

170211 - Long-term 5Pcnt 100MA Deviation

Complacency abounds as reflected by the Rydex ratio, Advisor’s sentiment Survey, and VXV:VIX ratio. Just take a look for yourselves.

Rydex Ratio170211 - Rydex Asset Ratio

Advisor’s Sentiment SurveyAdvisor's Sentiment - 1998 current to Feb 2017 - marked

$VXV:$VIX Ratio170211 - VXV vs VIX

As we know, these conditions can persist for some time. I’ll be watching the VIX and BPI for evidence that sellers are taking control, but until then, let’s try our best to stay with the trend and stack the odds in our favour (something I find especially challenging in these types of trends). Which brings me to this post’s trade idea.

Trade Idea

Unless you’re playing very small time periods and timeframes, there isn’t a lot of opportunity for swing trader’s like me in playing indices like the S&P500, but I find it helpful to look at as a bit of a roadmap. When in choppier zones like now, it’s better to delve into individual sectors. The strongest sector in my list right now is Real Estate. So let’s take a look at $IYR. It’s a beauty.

On the first trading day of 2017, $IYR broke out of an inverse Head and Shoulder’s pattern. It quickly formed a channel and has since consolidated its gain inside of a bull flag pattern. I bought this Friday on the breakout and I think it’s just getting started. The target from the inv. H&S is approximately $83 which also lines up with $IYR’s typical deviation from the 100MA limit and the 2016 highs. There’s still plenty of time to hop on this one, in my opinion, especially before it breaks out of its 6-month downtrend line.

170212 - IYR daily chart

Good luck!

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