Superb Shorting Opportunities Developing Now in the SPY ETF and Elsewhere

spyetf20090924  The SPY ETF got some bearish downside continuation today from yesterday’s key reversal day on heavy volume.  The bulls tried to get a rally going many times throughout the day to try to create a price swing reversal bar but failed to accomplish anything meaningful by the close.

Volume came in heavy again on the downside on the SPY ETF at least relative to the upside volumes we have been getting over the last month or two.

Tomorrow’s action is key because it will create the closing weekly price bar on the SPY ETF, and if we close near the lows tomorrow or at least have a decent down day then it will create a bearish looking weekly reversal bar which will be the first one since June 14th, 2009, the time period of our last more extended correction.

Then next week the first three trading days of the week will finish off September and will create the closing monthly price bar on the SPY ETF.  If we get enough price destruction the next 4 trading days then it may even set up a bearish looking MONTHLY price bar on the SPY ETF which could potentially signal more bearish continuation into a good part of October.

I suspect this will be the case because I am already seeing the bearish divergences play out and generally the price destruction starts slow and then gets to an acceleration point after the bulls finally give up.  But we will have to see how the weekly and monthly price bar closings come in during the next 4 trading days.

Ultimately I think we have a decent shot at hitting the 94 level on the SPY ETF.  That level will probably mark the worst of this mini bear market decline, but of course I will have to evaluate as we go forward.  The larger debate about whether this will initiate a much more severe bear market that takes us to the March lows again I think is premature at this time.  Lets see if we can get to 94 first and then we can start thinking about what else is in store.

As you can see on the chart, the whole up move since the March 2009 lows resembles a large rising wedge formation.  Breaking down through the lower rising trendline that makes up the wedge (red circle) is the move that will confirm the break down from this large pattern.

On the chart you can see that there is also somewhat of a smaller mini rising wedge within the much large rising wedge.  The mini rising wedge is drawn with the red dotted trendlines.  Today it looks like we almost touched the support area of this mini wedge and I suppose it is possible we could bounce up tomorrow on the support of this mini wedge.

If that occurs it may set up an ideal shorting opportunity.  Rising wedges can be tricky because they have a tendency to keep pushing prices higher and higher up until the last minute until finally everyone gives up all at once and you get a severe price decline.  The price declines once they get real footing can be quite rapid.

So the best scenario for going short is to get a one to three day upside LOW VOLUME bounce.  That bounce may start tomorrow and last one to three days but we will have to see. 

I am going to be watching very closely how this bounce develops and the volumes on the bounce to get positioned short with puts on some individual stocks (BAC comes to mind) and inverse ETFS.  I already went long the TZA yesterday, but I suspect that there will be another chance to go long the TZA in the days ahead on a weak volume bounce in the broad market which should cause the TZA to pull back a bit.

Posted in ETFS, Index Trading, SP500
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