While the S&P 500 is set for a record year, traders would be wise to take short-term profits and hedge long-term longs, reports Ricky Wen.

The second week of December played out in a picture-perfect manner offering little to no surprises per our expectations. If you recall, this setup was fully assisted by the ongoing bull trend and the first week of December the 20-day exponential moving average stick-save setup where everybody had opportunities to load up efficiently. In essence, last week played out as the usual eight-day exponential moving average acceleration and the E-mini S&P was guns blazing into the 3193.75 target. multi-month measured move target.

Well, here we are as expected, the market is now heading into Christmas/yearend with the S&P 500 up about +27% with a lot of traders just in an autopilot mode as it’s been a spectacular year. The main takeaway from the second week of December is that short-term we’re quite overbought or overextended based on Friday's warnings/readings of the proprietary signals combined with the momentum metrics. This boils down to either a quick mean reversion or it gets even more extended as price does not care and just ignores everything for a few sessions until yearend.  

Overall, it’s very crucial to understand the overall risk exposure here for a short-term vs long-term portfolio and when and where to rotate as we head into Q1 2020. Stay levelheaded going into 2020 even though 2019 has been ‘that easy’ even if you were super late to the train like us.

What’s next? 

Friday closed at 3175.5 on the E-mini around the highs of the week as price action broke above the 3158 trigger/ignition level from the four-hour projections chart. Overall, it was a fairly methodical/textbook 101 week that followed all our momentum rules with the market staying as an inside week for two to three days and then ramped into the usual Friday dead highs. Feels like deja vu every week now and that there are little to no surprises lately, so got to keep doing what’s been working. 

In summary:

  • Wait for the likely first try rejection reaction to play out here because 3193.75-3200 is a key zone and the 3193.75 target is already considered fulfilled as of last week’s Friday Dec 13. Adapt!
  • Immediate trending supports going into this week are 3177 and 3158.
  • Be aware of rangebound week strong possibility: 3200~-3158~
  • This week is mainly about not being a pig because targets across the board (indices + important stocks that we trade had fulfilled or more than fulfilled their respective targets into yearend already)
  • Realize short-term gains and hedge the long term portfolio properly. It’s crucial to know when to scale out, take profits and rotate positions going into Christmas/yearend if you haven’t already because the December contract expires this Friday and we’re going to be trading the March 2020 contract from now on
  • Seasonality argues that the last five sessions of the year + two first two sessions of the new year will be heavily favored towards the bulls after this week’s likely rangebound grind.

Ricky Wen is an analyst at ElliottWaveTrader.net, where he hosts the ES Trade Alerts premium subscription service.