Threading the Needle

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Thus far this morning, the S&P 500 touched the 20 day moving average again and is in the red. After the exuberant move higher in a straight line off of the lows last week, some giveback here is a welcome site for those looking for a healthier swing trading market. However, a consolidation in and of itself is not necessarily bullish, as evidenced by how sharply we rolled over in late June after several doji days.

My view of a bullish case would be to see a higher low hold in the coming days. My most profitable trades have come from what I call “threading the needle,” whereby I closely watch a potential bearish to bullish reversal, but do not chase the initial breakout. Instead, I wait to see if a pullback from the primary breakout holds a higher low, and only then do I become aggressive. In gambling parlance, I am only looking to get the lion’s share of my money into the middle of the pot when I “have the best of it,” in terms of probabilities.

Keep in mind that the higher low, if we get one, could happen as early as today. The main thing to look for in the tape is a pattern of a thrust higher, followed by a pause, followed by another push higher from an underlying bid. I may make some trades here and there, but my huge cash position is still consistent with that of a corrective market.

Look to see if 1071 and 1068 can hold as short term support, with the 20 day moving average above 1075 acting as obvious resistance.