Price action on June 29th sent major indices about 2% lower. Which is the first major sell off I have seen in a while.
With the situation over at Greece, and from what I understand a few other potential European countries, a “dash of shorts spice” was thrown into the markets.
Over the past few years, most short-term selloffs turned out to be a buying opportunity, but as they say hindsight is 20/20 vision.
As one who got burnt going short on the indices I am trying to be a bit more careful.
My analysis suggests that the Russell 2000 is the leader recently, so I opened a weekly mini Russell 2000 chart and plugged in some indicators I like to use along with Elliott Waves (which I think is one of the better timing tools available) and here is what I see below:
In order for the Russell to confirm a sell signal based on the weekly chart, I need to see a daily close below 1244. Yesterday was VERY close to it but still closed above it.
I think that a close below 1244 can trigger 1089 over the next few weeks/months.
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Not an easy scenario to trade with as the memories of short attempts in the past few years not turning into much to say the least….
One way one can trade this is by using straight futures and going short on close below 1244. The risk on this one would be quite high as one would need to use a stop above 1280 or maybe even past the recent high above 1292.
Another way to go about it (and one can choose stock index of their choice) is to buy a vertical put spread, where you buy a closer to the money put and sell a further out of the money put.
Last but not least, if the market is able to hold above this level we may yet see one more attempt higher before any serious chart damage occurs. Statistically, it might be the best set up as stocks simply refused to go down these past few years thanks to QE…
As always, certain strategies may be more appropriate for certain traders, depending on their experience, market outlook and risk capital.
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