Gold, Stocks: Tough Markets to Trade Now

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

NEW YORK (Options Trading Signals) -- A lot of eyes were watching the Slovakian Parliament around the closing bell Tuesday as it voted on the European Financial Stability Fund (EFSF).

Legislation approving the enhanced bailout fund failed to pass on a first vote, but members of the opposition party have indicated that they will vote for the bill in a second vote.

The trapdoor risk for equity traders is that the second vote comes up short. The market is expecting the second vote to pass without issue, but if it doesn't, selling pressure could become extreme. This just adds more headline risk when the market already had plenty because of earnings season.

We have seen the S&P 500 Index rally more than 10% in five trading sessions. That means the market may have to see more declines before it can probe higher.

The flip side of that argument is that prices continue to rally and push toward key resistance levels.

Right now, I do not have an edge for a directional trade, so I am sitting on the sidelines. I do have a few time-decay-based trades in place, but they do not have a directional bias. Thus, my book is flat.

The S&P 500 is a tough buy after a 10% rally in such a short period of time, but the strength and momentum are tough to short. The buyers seem to be higher and the sellers appear to be lower, which further complicates a potential entry. Presently there appears to be two possible scenarios:

Bullish Scenario

The daily chart of the S&P 500 index is shown below with key overhead resistance levels illustrated on the chart and the potential price action in coming days:

Bearish Scenario

The daily chart of the S&P 500 index is shown below with key support levels and the potential price action if prices work lower:

Overall, I do not have a real edge on the S&P 500 at this point. A pullback makes some sense here, but defined risk metrics and a trading plan must be used to reduce risk. Regardless of the price direction traders are considering, this is a situation where proper position sizing and stop orders can allow a trader to take on a defined risk that he/she is comfortable with.