Closed: March 2012 S&P 500 E-Mini Futures

A few minutes ago we sent by email a note that we were further lowering stops on our E-Mini S&P 500 position to 1309.75.  Factors influencing the move are as follows:

• The decline in the cash S&P 500 index found support this morning at the lower end of a channel.   Failure to break the channel is more indicative of a corrective move downward rather than a move in a new trend.
• The second leg down was just shy of being equal to the length of the first leg down at 1304.44 (green line on our chart).
• Prices recovered from this support area and climbed to the 61.8% retracement of the decline (red line) at about 11:15 EST and pulled back slightly on the 15 minute chart.   61.8% is a deep retracement and seeing that level hold would strengthen whatever bearish case remained.

The first two items caused us to lower our stops to 1314.25, just above Monday’s late-day high.   If that level remains unbroken then it continues to be possible to count the move up from Tuesday’s opening lows as merely corrective.   However, it still leaves us open to a potential loss of $650 on the position.   The continued strength reduced the likelihood that a top is in and suggested we switch from offense to defense.

The one bar of weakness from the 61.8% retracement level on the 5 minute chart was enough for us to choose this as a swing high which we wouldn’t want to see broken.  If sellers wanted to come back in, this would be a good place to do it and the start of a down move gave them a spot to pile back in.   We lowered our stop to two ticks above the corresponding high in the futures to reduce our downside risk to a total of $200 (excluding slippage).  This stop was hit and we are now out of the position with a $200 loss on the books.

We need to be aware that the the break above the 61.8% retracement doesn’t rule out a top being in at Monday’s high.   Likewise, Monday’s late-day swing high still stands.   So it remains possible that a lasting high is in for equity indices and we gave up a short position.  We are OK with that.   We have been looking for places to try and get in early for just such a move.   We had a good spot picked out, but prices failed to drop the way we expected them to after the entry.   Therefore we wanted to manage the risk.  The possibility of additional loss by leaving our stops up higher wasn’t adequately compensated given the price action.

As can be seen on the charts, the S&P 500 has already turned down somewhat from just above the 61.8% retracement.   If it makes new lows and shows signs of continuing downward we will look for places to re-enter short.   Whether we get back in from higher or lower levels, this continues to be a trade we are stalking.

An opening drop helps our new short position in the S&P 500. However, this morning’s gap down in the cash index is being reversed and, so far, the overall move from Monday’s high is consistent with a correction. We are going to lower our stop loss from 1318.50 to 1314.25. This level should not be exceeded if a turn down is in place and it will reduce our losses if additional highs are to be seen prior to any significant bear moves.

This is a fictitious model portfolio managed to demonstrate trading techniques which may be used to trade a speculative account. The description of this hypothetical transaction is for education purposes only. Nothing related to the portfolio should be interpreted as a recommendation to buy or sell any security and the general techniques employed may not be suitable for every individual. Past performance of these techniques or this portfolio may not be representative of future results and results shown may vary from actual, live trading results subject to commissions and live market conditions including liquidity.