June 6th, 2023

Does This Chart Show The Rest Of The S&P 500 Is Ready To Join The Rally?

After Friday’s blowout rally, the market was muted yesterday. There wasn’t a major catalyst to help the market move in one direction or another.

Apple’s Developer Conference wasn’t enough to get people excited about Apple.

The decision from OPEC to cut 1 million barrels wasn’t enough to shake up the markets either.

The only news to hit the tape was some weak economic reports that showed manufacturing is puddling along.

So, let’s look at something else I find interesting.

We’re going to look at a chart of the S&P 500 (SPY). For those who don’t know, the SPY is a weighted ETF, meaning some stocks help move the price of the ETF more than others.

Since October the index ETF has been making a series of higher highs and high lows. That would say the S&P 500 index is in a solid uptrend.

But wait!

Now, let’s look at the equal-weighted ETF of the S&P 500 (RSP).

You’ll see that we had a lower low and no higher high. Why is that? Does anyone know? I’ll wait…

The market rally in the S&P 500 has been predominantly from 5 stocks this year. So, what we’re watching for is to see when/if the RSP will join the party. If the RSP chart can start looking more like the SPY, that means the broader market is participating in the rally.

That’s not to say the current SPY rally isn’t good, but it does mean you need to be more selective in which stocks you’re looking to trade. That also means making sure your risk-to-reward ratios and profit targets adjust with the current market conditions.

Look at the chart below as we zoom into the daily chart of the RSP. You can see that the index did participate in Friday’s rally. You can also see that the average trading volume has been picking up since May.

If that isn’t positive enough news, the chart below also shows the RSP crossing above both its 50-day and 200-day moving averages. I think it’s a sign that we could see some interest coming into more stocks soon.

BUTTON: Get Today’s Trade Idea (and more)
Before we get into the trade idea, let’s look at a trading chart pattern. It’s called a Bull Flag. It’s characterized by a strong impulsive move up, followed by a period of consolidation, and then a continuation move higher.

Here’s an example of one:

Now, let’s look at Boeing (BA) on a weekly chart. We had a solid run higher and now a period of consolidation. We’re finding support at $200 and resistance at $220. This is going on my watchlist and I’m looking for BA to drop closer to $200 or break out from $220.

The 21 July 200/195 put spread is going for $1.25 in credit already, which meets my criteria for a credit spread. But, if BA does trade near $200, that same spread is going to be valued at around $1.97.
You can potentially get a 57% better price by waiting for it to head lower. Yes, that means trading an at-the-money credit spread, but if that doesn’t fit with your style, I’d still wait to trade a credit spread.

What happens if I put on my $200/$195 put spread when BA is trading around $200 and then it falls below $200? I get out of the trade. I was wrong. But I’d rather be wrong after getting in when BA is trading at $200 than be wrong when BA is trading at $208. I already showed you that you could lose as much as 57%. I’m ok being wrong when I know I’ve optimized my entry.

What if you miss the trade because BA never gets as low as $200? Well, I’m also looking for that breakout above $220. So I will be setting an alert for BA when it trades at or below $205 and I will set up another alert at or above $215.

If you have any questions, comments, or anything we can help with, reach us at any time.
Email: [email protected]. 

Jeff Wood

Editor, Filthy Rich Dirt Poor
Coach, Options Testing Lab

Any trade or trade idea discussed is for educational purposes only.  They will not be tracked as an official trade recommendation.