S&P 500 Trading Back Near the Highs

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Mar 24, 2015

S&P 500 Trading Back Near the Highs

For most of this year, stock markets have posted impressive rallies that have left many new investors wondering whether or not it still makes sense to start buying into the trend. These are valid questions, as it might seem risky to some to start establishing long positions with valuations trading at elevated levels. If investors buy-in too late, they can run the risk of getting caught with entry prices that are too high and vulnerable to corrective pullbacks if a majority of the market starts to take profits on their positions.

To some, buying into assets tied to the S&P 500 might seem to violate the basic market rule that investors should always be looking for opportunities to “buy low and sell high.” So it is a good idea to take a closer look at what exactly is happening in the S&P itself in order to gain a better understanding of what is likely to happen next. One of the best ways of doing this is to monitor activity in the SPDR S&P 500 Trust ETF (NYSE: SPY). This is one of the market’s most commonly traded ETF and a primary vehicle that is used to track activity in the S&P 500 itself.

When we look at things from a fundamental perspective, there are some added factors that should be considered when making assessments and constructing an outlook. One of these factors is the current strength of the US Dollar. “Against the Euro, the US Dollar is trading at its highest levels in more than a decade,” said Sami Hadi, industry analyst at Simply Liquid E-cigarrettes. “This has led to added speculation in the market that companies with high levels of international exposure could start to see declines in foreign sales.” This is an important point to consider because foreign consumers will now be forced to pay more for items produced by US companies. And if this start to weigh on earnings prospects for S&P 500 companies it could be an early indication for declines down the road. But until that happens, we must still assess price activity as it is actually seen -- and here we will look at the technical view in the SPY.

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SPDR S&P 500 Trust ETF (NYSE: SPY)

Critical Resistance: 2120

Critical Support: 2040

Trading Bias: Look to Buy Dips

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S&P 500 / SPY - Stock Trading Strategy: The SPY is trading very close to important resistance levels, which makes it difficult to establish new longs. But the long term trend is still positive and this makes buying on dips the preferred strategy.

Price activity in the SPY is still surging forward and we are now within striking distance of the all-time highs at 2120. MACD readings are still in positive territory and there is little reason to believe that we will not be seeing new highs as we head into the month of April. But at the same time, risk to reward ratios are skewed in unfavorable ways and it is very difficult to argue for breakout strategies in at asset that is trading at new records. Because of this, it is much more prudent to wait on the sidelines to that markets have a chance to correct back toward the historical averages.

The first level to watch in this regard can now be found at 2040 which is the historical low from earlier this month. Indicator readings show that there is a lower high on the daily MACD and this is suggestive of a slowdown in momentum. This might seem disheartening for those that are looking to establish bullish positions but a decline here might be the blessing in disguise that allows newer traders to get into these markets. In all, buying on dips is the preferred strategy as this will help bring risk to reward levels back into more appropriate territory. The overall trend is still bullish, so this type of activity makes it much easier to justify new long positions in the SPY or other assets tied to the S&P 500.