Stocks started 2015 inauspiciously with the S&P 500 (SPX) down 3% in January. That equates to a coin toss regarding how stocks will end the year (the January barometer is only meaningful when stocks end the month higher). Putting that larger investment question aside, the price action is supportive to long entry scenarios for a risk-defined position trade in securities pacing the SPX.
Simply put, the index reverted to the weekly mean (20-week simple moving average) and appears to have hammered out a bottom there. Reversions to the mean in an uptrend are often followed by rallies to new highs. They show that a bout of profit taking by momentum traders has run its course and set the stage for the larger trend to resume. And this may bring opportunity for trend traders.
Check out the weekly S&P 500 chart below.
S&P 500 (SPX) Weekly Chart
The weekly chart shows that SPX pressed the weekly mean for the past five consecutive weeks (and in mid-December) and attracted buying. You can see this in the lower shadows in the first two weeks of January, and what will be a bullish belt hold this week barring a lot of selling tomorrow.
This trade amounts to buying the dip in an uptrend, plain an simple. I generally avoid price targets and prefer trend-following techniques such as staying long until the mean turns down.
I’m still cautious toward this year since weekly momentum has been slowing since the beginning of last year. But price comes first, and as things stand, there isn’t any indication that the sellers are taking control of the market.
Thanks for reading and remember to always trade with discipline.
Follow Chris on Twitter: @ChrisBurbaCMT
No position in any of the mentioned securities at the time of publication. Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.
