The HYT Trading Week: Indexes Getting Sandwiched

A lot of huffing and puffing this week has resulted in very little movement albeit a slow drift higher. Let's look at this S&P 500 chart. The index is still being sandwiched between the 50DMA and 200DMA (at 1,108 and 1,024 respectively) with the index closing Friday at 1,075.

As always, my advice is not to try and guess which way it will move, but rather to be in the correct position to take advantage of the next trend. As I've only just restarted this blog, let me put some numbers to the trade.

I will assume that every new trade can be split in two, so for simplicity I will assume 2 contracts. Markets can be volatile and this allows one to take profits from one contract and thereby leaving the second one to trade 'free'. If the trend continues then we will accumulate and as it reverses take profits.

So, on 22 Jan 2010, Short S&P 500 at 1,115 with 2 contracts.

We can now safely move our stop down to 1,105, with a guarantee of a 10 point gain (about 0.9%). The strategy now is as follows: if the index continues to rise we will close when it hits the SAR (about 1,085) and then the 50DMA (about 1,105); if the index starts to drop again then wait until it reaches the 200DMA.

The point here is that we can now afford to be patient. Last week's newsletters seemed to be filling space saying that essentially nobody knows what's going to happen next. If this proves to be a minor correction and the upward trend continues, then we've made a bit of money. If this proves to be the start of another leg down, then we're in the right way round.

I will now tend to write at High Yield Times at the weekend unless one of the indicators is triggered, at which point I'll post during the week.