Wednesday, September 8, 2010

SPY - What is Your Favorite Color?

The SPY has been bouncing around between 101 and 114 since shortly after the May 6 flash crash, often times bouncing off of Simple Moving Average (SMA) lines. From this view I have been unconvinced that any nascent trend will hold and have been mainly in cash. But that is my opinion and is formed because I tend to trade single names for a short period of time, usually less than a week. I use the trend to understand which way the wind is blowing and to put it at my back for these short term picks. But how else could you see the SPY activity? Look at this chart:

SPY Daily Chart

Where are your eye's drawn? Do you look at the longer term green Fibonacci lines from the March 2009 lows to the April 2010 highs? If so then you are probably an investor, with a longer horizon, and you might read this chart as a pullback off of the highs that has not yet retraced to the 38.2% level just south of 100, leaving you uncertain as to whether the uptrend is over yet or whether the trend is down now. If this is you then you might be cautiously buying and/or protecting your downside by buying puts.

Or perhaps you are drawn to the magenta box, and see a long term range between 101.13 and 114.74 for a year, except for a brief period March through April 2010 that rose slightly above it. If this is you maybe you area position trader, waiting for the break out of the box to put your money back to work in the SPY.

On the other hand maybe your eyes are following the rolling blue, red and green moving average lines which have been in a tight 12 point range since August last year and narrowing to where they are in a less than 3 point range today. If this is you then you probably also see the flat lines creating uncertainty and are looking for them move and point out the next direction before you jump all in.

Perhaps you look more to the right side of the chart at the downward red dotted trend line. The current price action is pressing against that line right now. If this is you then you are probably closer to being a swing trader and have taken the approach to the trend as an opportunity to take profits from the run off the bottom until you can discern if the trend will be broken or held.

Finally, you might be a day trader (or an algorithm) and only glance at this chart once everyday or so. For you it is important to know how the market is trending and when it might change to determine daily limits but this chart does not drive you decision to deploy money. You are the only one who should be trading right now.

You need to have a plan to trade in this market. If your plan is colored green, magenta, red or blue you might be best served by waiting for your moment.

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