Shorting opportunity

August 17^th, 2012

Nick Hays

Norfolk, England

Today – on The Long and the Short

* Short-term correction possible

* S&P 500 approaching resistance levels at 2-year high

* Market complacent? VIX at 5-year low

The S&P 500 is approaching some critical price levels and a number of indicators are pointing to a short-term correction.

Firstly however, a look at the medium-term picture. As I wrote in my last post, hopes of further monetary easing by the Fed and ECB promises to “do whatever it takes” appear to be trumping the poor economic data for now, and this is translating to higher equity prices.

The S&P 500 index has broken above its 200 and 50-day moving averages in what looks like a fairly convincing manner and both averages appear to be providing some level of support. See the below chart.

In the shorter-term, however, a correction looks quite likely for three main reasons.

First, the index is approaching 1420, an area which twice provided resistance back in March (shown in the chart below). This resistance level is the index's highest for more than four years (since May 2008) and so represents a significant test of the conviction of this current bull run.

Second, the index is close to the upper range of the bullish channel which has formed since around June. This should also provide resistance to a further rise in the short-term.

Third, the RSI, while in an uptrend since June, has been looking toppy at 80+ and the last few days may be already signalling some loss of momentum.

I see an additional reason for short-term caution in the VIX. The so-called ‘fear index’ is now at a 5-year low and well below its long-term average. This could be signalling some complacency in the market.

With the S&P flirting with the critical 1420 level, watch carefully for a shorting opportunity next week. Target of 1370 and a stop-loss at 1440 should resistance levels be taken out.