Flip the Picture Upside Down

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It is tough for me to list a set of long trading ideas given the menacing shooting star candle which remans valid on the SPY daily chart. There is a huge psychological ping-pong match happening right now, where just about all market observers recognize that we have been in a trading range for several months. While there are still plenty of sloppy charts out there, the contrarian in many traders is telling them to look for a breakout form the range in no time, because that will supposedly frustrate the greatest amount of market participants, as the market is prone to do.

I can appreciate that type of thinking, but at the end of the day price is going to trump perceived sentiment. To be clear, if I saw more high probability setups I would be inclined to jump all over the contrarian case of breaking up and out of the 1120-1220 trading range on the S&P 500. Indeed, that may very well happen soon. As an example, looking at the charts of LED firms RBCN and VECO below, you can see just how absurd those downtrends are starting to become. Even if those firms are actually going to go out of business eventually, their stocks are bound to see a bonafide sharp rally (or two) to at least the 50 day moving average.

In the meantime, though, if you flipped the chart of the SPY upside down, you would see a steep decline followed by a prominent gapping inverted hammer. A question to consider: In that scenario would you consider it wise to aggressively play for further downside? The correct risk/reward strategy would be to lighten up on shorts and respect the idea of at least a short-term bottom. Flipping that scenario back to the current one, we have seen a very steep, if not historic, rally over the course of a week, followed by a shooting star candle. The idea would be to lighten up on longs if you were in heavy, out of respect for at least a short-term top.

A few days of firming up charts can quickly flip the landscape back to a high probability scenario for longs, but until that happens I am going to respect risk and price action over a tempting contrarian play.

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