A while back I posted, http://esl.typepad.com/tradingtechniques/2008/02/spy---moment-of.html which indicated a potential short on the SPY (SPY). It's been a few months since that post and we now well into the trade, however there are some warning signs that are appearing letting us know it may be time to take final profits.
Once the trade is entered I switch to Gann to help me determine where potential trade failure levels exist, remember the whole goal of the trade was for the SPY to make new lows down to 124. As a defensive trader I am always looking for key reversal points where the trade may fail. We hit one of those points on March 10 and had a reversal off of the 4X1 Gann Level (Green Level), this is a very common failure point for Wave 5's and must be respected, this is a place where I take some profits and adjust the stop to at least the entry. While I realize the rally was based on news, it still occurred at a key level. Our next big test is if we can pass the 2X1 (Blue Level), if we do the chance for new lows any time soon is very small. In any case these two levels may bracket the market in for a time similar to the pattern we saw in February (the 1X1 [Red Line] and the 2X1).
Ron Wheeler
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