Setting Up For a Bullish Swing Trade

The new year got off to a good start, with all of the major U.S. averages ending the first week of trading higher. As of Friday's close, every major U.S. stock index is back above its respective 200-day moving average, with the exception of the Russell 2000. The Dow Jones Industrial Average has already surpassed its October 2011 high, as has the Dow Jones Transportation Index, which tends to lead the major averages.

Reasons for positive sentiment are growing by the day. News about the U.S. economy has been surprisingly robust, with most forecasts beating expectations. The manufacturing and services data from the Institute for Supply Management confirm the economy's solid, if unspectacular, expansion. Construction spending also beat consensus forecasts. The increase in non-farm private payrolls and decrease in the unemployment rate announced Friday only added to the relative optimism.

Of course, the market is always hostage to a potential Black Swan event. But for now, at least, the S&P 500 seems to have broken its risk-on/risk-off obsession with the latest headlines from Europe. So much so, that the European press is now writing of the "decoupling" of the much stronger U.S. economy from a struggling, bumbling Europe still ensnared by its burdensome debt crisis.

Here's how I intend to play the U.S. sentiment surge over the next few weeks.

With the S&P 500 overbought on a short-term basis, I expect a pullback to support at its 200-day moving average, around 1260. After that, there is a good chance the S&P 500 will challenge its July high of 1345 in coming weeks. 

I'll be looking to enter the S&P 500 when it pulls back to around 1260, probably toward the middle of this week. Between that level and my target of 1345, there is potential for a 7% gain. But I'll be looking to double those potential gains to closer to 14% by buying the ProShares Ultra S&P 500 (SSO).

At the time of publication, Vardy had no positions in the stocks mentioned.