First is the Worst, Second is the Best….

• Posted by Greg Harmon
• on March 25th, 2015

My kids tell me this all the time. “First is the worst, second is the best…..” Maybe I have a practical application for this now.

Exactly one month ago sentiment seemed high for a reversal in the S&P 500 lower. The index had just hit new highs at 2119 and was hovering. Shorting as a stock or index makes a new high is not my thing so at that time I cautioned traders against doing. In the short term I was wrong. The S&P 500 pulled back 3.75% if you caught both ends. Not a bad trade. But who catches both ends?

I actually went a step further than just a caution. I suggested there is a better way to do it. Go ahead and short the S&P 500, but buy the German DAX, here. At the time the ratio of the DAX to the S&P 500 was at 5.308 and it targeted a move to 5.89. Guess what happened? It did keep moving higher but stopped short of the target, at 5.879. That was a 10.75% move. Almost 3 times as big. If you did not listen then I hope I have your attention now. A second chance may be setting up.

The original chart from a month ago has been updated above. After a short pullback the candle Tuesday, a bullish engulfing, suggests a new move higher might be under way. A third leg would complete a 3 Drives pattern and target a move to a ratio of 6.39. This would be an 11% move from the closing ratio Tuesday. Second is the best. Of course third is the one with the hairy chest. Not sure how that fits in but one step at a time.

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