(click image to enlarge)
Let’s start with S&P Futures (/ES) since they are the main benchmark for the broad market. This is one of the most liquid financial instruments on the entire planet, and gives us the most crystal clear perspective of the market.
Bullish Points: A symmetrical triangle recently formed (yellow lines). A couple weeks ago /ES broke symmetrical triangle resistance(gray oval), which is bullish. This break coincided with a break of 200 day simple moving average resistance. The 200 day SMA is very relevant in /ES, and this double break is very bullish for /ES during the first quarter of 2012.
Bearish Points: 1300 (red line) is a major price point in /ES. It is both psychological, and has proven reactions in the past year. At the moment 1300 is acting as resistance and /ES is right at it. This is likely to result in a short term retracement to symmetrical triangle resistance turned support, at which point a bullish entry make a lot of sense.
A short term short position makes sense here. Upside risk is 15 (1303 stop), downside potential is 40 (1250). That translates to 2.6:1 reward to risk, meaning the pot odds favor short term downside.
This can be played via a short position in the future or instruments like SPY & SSO. We prefer bearish options strategies in SPY here, and may even consider a moderately neutral strategy.