Index Option Trader

SPY Symmetrical Triangle Part 2

This is part of my previous post, commenting on the SPY symmetrical triangle setup. As one commenter duly noted, there hasn’t been any really significant volume to confirm the direction going one way or another.

 As you can see in the chart above (as of yesterdays close) SPY temporarily breached the upper trend line of the triangle. Some traders take this trend line violation as a signal and get long, which I believe is jumping the gun a bit. On the other hand, other traders usually wait for a candle to close (we’re talking dailies here) above or below the trend line before committing to a long or short position. Options traders may try to get in before the break as well, picking up cheap OTM calls if there convinced SPY is breaking out to the upside, or visa versa picking up cheap OTM Puts if they think were headed south. Given the size of the triangle, traditional technical analysis states that the size of the move following a breakout is equal to the size of the base of the triangle, leaving us with a projected 10-12 point move in either direction as a target price.

Although a move to the upside is probable, the short term RSI readings indicate were getting slightly overbought. Also the fact that the volume through this consolidation has been declining doesn’t bode well for an upside move. Remember we still have major upside resistance at a few key trendline levels, as well as the moving averages to break. Options traders may also want to look at a front month straddle to capture any move… after all pressure is really building up. With the resurgence of $100 oil, stagflation talk, and nervous CPI numbers of late, it seems though the bears have a better argument than the bulls — but remember the market isn’t always rational.