Why This Week’s Trading Will Set The Tone For Rest Of 2012 ($SPY)

Since the last two weeks of December are typically dead in terms of trading volume, there are really only two more “tradeable” weeks remaining in 2012. Therefore, it is fair to say the overall price action of the broad market over the next several days could easily set the tone for the remainder of the year. As such, today’s technical trading commentary will focus on a few key factors to monitor this week in order to help determine whether stocks might finish the year with a bang, fizzle, or plunge.

The potential challenge as we enter the final month of 2012 is that stocks must still contend with an abundance of overhead supply and technical resistance levels. “Overhead supply” is formed by traders who formerly bought near the highs, but did not quickly cut their losses when stocks headed south. Still holding on to these losing positions, these individuals are typically eager to sell into strength of any further broad market gains, simply in the hope of “just breaking even” (learn why hope is a very dangerous emotion for traders). This selling pressure formed by the overhead supply is what makes it difficult for a confirmed down trending market to fully reverse into a new uptrend, at least without a substantial period of correction by time (“back and fill” price action).

With the Nasdaq and S&P 500 still trading below their September 2012 highs by about 5% and 3% respectively, only a sudden surge in institutional buying (high volume) would enable the broad market to rally all the way to new highs in a short period of time. On the daily chart of S&P 500 SPDR ($SPY), a popular ETF proxy for the benchmark S&P 500 Index, we have annotated the key resistance levels to pay attention to this week:

Overall, the month of November was basically a scratch. The main stock market indexes printed significant losses in the first half of the month, then reversed to recover those losses in the latter half of the month. In the end, prices were little changed for the month. Despite this, the accurate signals received from our market timing model enabled us to still score decent gains in November by swing trading on both sides of the market (updated stats of our trading profits through November 2012 will soon be posted on “performance” page of our website).

Our market timing model has been in “buy” mode since November 23, the day it reversed from the previous “sell mode” after receiving signals that a significant market bottom may be forming. We still have two short positions in our model ETF trading portfolio, but the majority weighting of our swing trades (combining ETF and individual stock positions) remains on the long side of the market. Furthermore, if our timing model receives the proper technical signals to shift into a new “confirmed buy” mode, all bets on the short side would be off, and exposure on the long side would also be increased. But for now, maintaining a small percentage allocation of short/bearish exposure may help to reduce overall portfolio risk by basically “hedging” until/unless the downtrend from the September 2012 highs is convincingly reversed by the formation of two “higher lows” and “higher highs” on the daily charts. Trading objectively with a rule-based market timing system removes the guesswork and emotion out of knowing which side of the market to be on, and with how much exposure.

Going into today’s session, last Friday’s new swing trade setup in iShares Poland Index ($EPOL) remains an “official” buy setup with exactly the same trade parameters (subscribers to our Wagner Daily ETF and stock pick newsletter should note our exact trigger, stop, and target prices for this ETF trade setup on the Watchlist section above). We continue scanning for new ETF trading opportunities, such as buying the incredibly strong iShares Philippines ($EPHE) on a pullback to support. However, remember the best swing trade setups with a positive reward-risk ratio will eventually come to you. Avoid half-baked swing trading setups just for the sake of being in the action. If action is all you’re looking for, go to Vegas and get your fix. But if you’re serious about consistently raking in short-term trading profits over the long-term, you must develop the patience and discipline to follow our proven swing trading system taught every day in this newsletter.