S&P 500 Closing in on 5,000 for the First Time Ever

Tom Gentile

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By: Tom Gentile
February 14th, 2024

5 mins read

Originally published via our newsletter previously. Subscribe for early access!

Here is Newtons first law of motion: It states that an object in motion tends to stay in motion unless an external force acts upon it.

A renowned commodities and futures trader Linda Bradford Raschke is a person I’ve heard responsible for the phrase a trend in motion tends to stay in motion.

That definitely seems to be the case with the markets, specifically the ETF I usually highlight when analyzing US equities and that is the SPY: the tracking ETF to the S&P 500 (SPX).

Another respected name in the financial world, William J. O’Neill founder of the Investor’s Business Daily is known for an investment strategy of buying stocks at their 52-week highs.

The premise is stocks are at their 52-week high for a reason, whether it be great sales of their product or services, solid earnings, costs in line and innovative products or a combination of all and other reasons that bring in investors to that company’s stock.

I am writing this to say this is what seems to be going on with the S&P 500 as it is nearing 5,000 for the first time ever.

Until I see a catalyst or reason for a sell off my expectation is for prices higher.

Market in Focus: SPY – SPDR S&P 500 ETF Trust

SPX
SPX
SPY
SPY

There are difference in the two such as the SPX trading options European style and SPY American style. SPY cheaper of course than SPY and one has to pay a fee to own SPY. Also SPY pays a dividend.  SPY is the most traded ETF.


From the Desk of a CMT – Gold Case Study Wrap-Up

GLD continues to trade below the center linear regression channel line, with a worst-case scenario of a slight pop after the case study posted, followed by a momentum exit signal within two days if you used a filter.

It’s possible the rising implied volatility would have been a deterrent to a long premium strategy, but the set-up was bullish at the time. 

After a quick review of the set-up and exit using the 1/30/2024 data, the ingle call strategy will be compared.

Figure 1 provides a current view of GLD with the linear regression channel (start: 10/14/2022, end: 10/6/2023), the rate of change with its moving average (ROC: 14, 7), and volume bars with a 20-day moving average. It closed at 187.57 on 2/6/2024, down $1.02 since Tuesday, 1/30/2024.

Figure 1: GLD with Linear Regression Channel and ROC (14, 7) and Volume
Figure 1: GLD with Linear Regression Channel and ROC (14, 7) and Volume

The case study assumed an allocation maximum of 4% on a $25,000 portfolio and a max risk of $375 (1.5%). Figures 2 & 3 provide the risk information for the 1/30/2024 case study:

  • Buy to Open 4 GLD Apr 19 188 call
  • Sell to Open 4 GLD Apr 19 193 call for a net debit of $920

Exit for a potential gain:

  • A bullish move is followed by a bearish cross of the ROC moving average below the ROC line
  • A move to 193.50 for the underlying by March 1, 2024
  • 30 days to expiration (conservative, long premium)

Exit for a potential loss:

  • A bearish cross of the ROC moving average below the ROC line
  • 30 days to expiration
 Figure 2: Case Study Data with Bullish Momentum on 1/30/2024
 Figure 2: Case Study Data with Bullish Momentum on 1/30/2024
Figure 3: Case Study Risk Charts on 1/30/2024
Figure 3: Case Study Risk Charts on 1/30/2024
Figure 4: Case Study Data at Exit on 2/5/2024
Figure 4: Case Study Data at Exit on 2/5/2024

The single cross of the ROC MA line down below the ROC line on 2/2/2024 prompted the exit on 2/5/2024.

Despite a strong move upwards two days after entry, the case study rules clearly required an exit with the momentum change. If you look at the GLD chart, you’ll note there are not a lot of whipsaws for the ROC & ROC MA signals, but it’s what happened here.

As a side note, the strong bullish move on 2/1/2024 did move the optimistic quote to 60% of the spread’s max gain. At what level might you do some profit-taking? Does an approaching resistance line change your answer?

What if we had used a single call strategy instead (with a max allocation of $1,000 or 4% on a $25,000 portfolio and a max risk of $375 or 1.5%): 

  • Buy to Open 1 GLD Apr 19 188 call for a net debit of $545

The risk data is displayed below along with last week’s exit questions.

Figure 5: Long Call Case Study Data with Bullish Momentum on 1/30/2024
Figure 5: Long Call Case Study Data with Bullish Momentum on 1/30/2024

What rules would you use to manage risk management and profit-taking for a long call only position?

Both case studies are early entries for a long-term bullish price trend with a bullish momentum as a signal. There’s no reason to change the exit – momentum turned bearish and once this happened, the reason for entering the position is no longer valid. The 2/5/2024 exit is also warranted for the long call resulting in an $85 loss.

I suspect we’ll return to this chart when a more bullish set-up is in place, but for now, following the case study rules must be more important than the profit/loss result.

Regards,
Clare White, CMT


Thanks as always, Clare!

Tom Gentile
C1P: Chief 1-Percenter


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