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Day one: trading US 500

Potential strategy: sell US 500 (S&P 500) at 1785, with a potential stop loss at 1825, and add on a close below 1752.

I will look at selling one contract of the US 500 cash at market, with a stop just above the November 29 high of 1812. The uptrend drawn from the November 2012 low comes in at 1752, although if you look at the trend which was broken in October (see higher trend line), support comes in a 1770. I will look at add to positions on a close of this support.

Potentially the index can look to test the 200-day moving average over time at 1706.

Momentum is accelerating to the downside on the daily chart and given the decline in sentiment of late, upside seems fairly limited in the short term.

Fundamentally the market managed to pull back last week, ending what was a poor January, despite Q4 earnings season being strong. 50% of S&P companies have reported, with 79% of these beating on earnings (EPS), while 65% have beaten on the revenue line. This is above the sort of performances we saw in Q3. If you look at the fact that the market has focused more heavily on the misses, it says a lot about sentiment.

In terms of major companies, the big headline names are behind us and the market should pay full attention to the raft of US data and other macro forces, such as the price action in emerging markets. The correlation with USD/JPY is extreme right now, so any pullbacks in this pair could push the S&P lower as well.

On the data side we get the ISM manufacturing data tonight (02:00 AEST), while the highlight is undoubtedly Friday’s non-farm payrolls report. I will update each of these data points this week, but poor data could add to the progressively negative tape.

So all in all I am looking to take advantage of the pullback in sentiment; while I am looking at small size initially I will look to add when conditions become more negative.

US 500
IG Charts

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