Trading the S&P 500 for fun and profit!

BThackray_2015_investors_guide_cover_200x300

 

June has lived up to its seasonal tendency to be a volatile month. Thackray’s guide tells us that its historically the third worst performing month from a seasonal perspective. He says that the average return for June since 1950 has been a whopping 0.0% return. Sweet!

tsx seasonals

 

s&p seasonals

Jon Vialoux’ s charts at www.equityclock.com shows us that both the TSX and the S&P500 are rather lame looking during June. The TSX has been the worst performer according to Vialoux’ s work, but bear in mind that his charts contain about half of the data as does Thackray’s work. For this reason, I always recommend you own a copy of Thackray’s Guide in addition to consulting with Equity Clock’s charts—you want the longer termed data from Thackray to give you a backdrop – then the visuals that Equity Clock provides you with recent history.

Currently, the S&P500 is trading in a range. Its lid of 2130- ish has been challenged at least twice recently – and the lows have also began to level out at around 2080-ish. This smells like a traders market rather than an investors market, as one of my regular readers Dave H pointed out. Here’s how I might view trading the current sideways movements for fun and profit.

The chart below shows us the S&P500 along with Stochastics, RSI, MACD oscillators below. The bars themselves are surrounded by Bollinger Bands. As you might note on the chart, MACD (bottom pane) is useless for near termed trading. You’d have to adjust its MA’s and signal line to generate short termed signals—a difficult thing, given the fact that MA’s smooth prices to begin with. I put MACD up to illustrate its lack of use in short termed timing. Its still a great longer termed indicator.

S&P timing

Stochastics is our fastest mover – its signals can come from a hook from an overbought/oversold level. The more extreme the better. RSI moves a little slower unless you adjust its calculated period. I used the default 14-day look-back.

Bollinger bands are used in many ways –such as a contraction (also called a “squeeze”) that can help signal trend changes. But for this study, we are simply going to look at price vs. the upper and lower volatility bands. If price hits the upper band, it’s an overbought signal, and a lower band touch is an oversold signal. So, we’re looking for:

  • An oversold or overbought oscillator (Stochastics and RSI are the favored indicators for this study) with a “hook” up
  • A touch or “really close” touch of a lower (oversold) or upper (overbought) Bollinger Band
  • An approach or touch of the top or bottom of the current trading range – which lies around 2130 (top) to 2080 (bottom).

 

I’ve drawn horizontal lines – green for buy, red for sell- either is triggered whenever 2 of the three indicators (RSI, Stochastics, Bollinger band touch) simultaneously signal. Again–I am being generous in allowing “really close” Bollinger touches or RSI signals on some signals.

You can see that the signals worked very well, especially a few months back. The market is now getting into a very tight trading range. Traders are likely best to adjust the look-back periods on all of these indicators to shorter time periods if the market wants to continue trading tightly. Recently, a sell signal came out as the top Bollinger Band was hit, coinciding with a Stochastics hook . This coincides with a failure to break the top of the S&P’s trading range (2130-ish).

Perhaps it’s time for short termed traders to take action on this signal.

 

Happy trading!

 

comment

2 Comments

  • Thanks Keith for sharing your thoughts. I noticed the narrow fluctuation range has been creeping up in the last couple monthsfrom 2080-2120 to 2090-2130. That’s only +/- 1%.

    I am wondering what kind of investing (speculating) tool you will use to trade the market with?
    What do you think about leveraged ETF line HSD and HSU?

    Thanks
    Nick

    Reply
    • I haven’t used many leveraged ETF’s in the past – they are best for very, very short termed trades ( a few short days at most)–but certainly they would work if you kept that in mind. Traditional stuff like SPY is the least aggressive way of trading this pattern

      Reply

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