SPY - tag category postings

The SPDR S&P 500 ETF may have a shot at making it back up to the April 2010 highs if it can climb above key resistance late this week or early next week.  Key resistance on the SPDR S&P 500 ETF is 113.20

The pattern in the SPY since mid June is taking the shape of a cup and handle formation.  It is possible that we are about to start forming the handle by the end of this week.  The alternative scenario is that we do not form the handle at all and just power higher out of the rising wedge formation.

It would seem that this weeks employment report on Friday is going to decide the market direction.  My current take is that it will probably be bullish and lead to an upside breakout from the current pattern.  One could argue that a tight handle has already been formed starting on 7/27/2010.

The upside projection of this pattern if true is back up to the April 2010 highs.

On the weekly charts I am also seeing indications that the weekly macd wants to turn upwards for a bullish crossover, a bullish sign.

Volume on the SPY has dried up to almost nothing in recent days but it is worth mentioning that there are probably a very large amount of stop orders just above the 113.20, which if hit, could trigger a surge in upside volume (bears covering shorts and new longs jumping in speculating on new highs).

Despite the fact that the SPDR S&P 500 ETF has been trading in a messy trading range for several months, I have to say that the setup here is quite intriguing because we have a significant resistance level that if broken topside implies a move back to the old April 2010 highs.  If we fail here and break down into the end of this week then the first quidepost will be be support at the bottom supporting line of the rising wedge drawn in the chart above.

So it appears there are 3 possible scenarios here or battles if you will:

1. Cup and handle breakout above the 113.20 level on a upside surge in volume implying move to April 2010 highs.
2. A break down to the bottom supporting line of the rising wedge which is then supported again for rising prices thereafter for another shot at the 113.20 level.
3. A break down below the bottom rising wedge support line leading to a fast bear market drop to the 102 level on the SPY.

The bears want a break down from this rising wedge.  The bulls want a break up from the wedge above 113.20.

For the bearish scenario to play out we really need to see a break down at or below 110.50 on the SPY maybe by this Friday or early next week.

I was stopped out of the USO United States Oil Fund LP long trade I mentioned yesterday.  I think Murphy’s low applies here, what can go wrong will go wrong especially when it comes to picking spike bottoms.

Crude Oil has moved into an even deeper oversold region and it could still be forming an interim low, but for now I am going to stand aside from this one.  The deflationary forces appear to be extremely strong and persistent now.  This could mean that any bounces we do get are going to be weak and maybe not even worth playing as an upside bounce.

The stock market is breaking down badly today again.  The bounce has not arrived as of yet but there are some volumes I will be looking at end of say on the SPDR S&P 500 ETF to see what it might tell us about any forthcoming bounce.  I will do a follow up post on that specifically later on today.

I may take an entirely new approach to this bear trend partly because of the way the market is acting today.  My latest thinking is that we could be in an environment the next 3 to 6 months that may be so persistently bearish that it will become very very difficult to re short on market spikes.  It may be too difficult to time those because they may be too weak in nature.

We may be dealing with an extremely persistent newly bearish trend here that is the exact opposite of the bullish trend that existed from March 2009 to April 2010.  But the difference is that bearish trends can be extremely and even more persistent than bullish trends because of the power of the emotion of fear.  And they also can tend to move a lot faster.

So if you have a market that takes 5 steps down for every 1 step up, how will you get the chance to re short that market ?  It will be very difficult to say the least.  This is why I am hopeful that we get at least a meager bounce in the days ahead so that I may start a position trade on the short side and then just keep adding to it if possible on any new spikes up in the market.  That may be the best way to play the bear trend especially if you are very bearish going into September 2010 of this year.

A very aggressive bounce from these levels would be a dream come true for the shorts.  The question is can the market even get a medium sized bounce from here?  So far I see 5 straight weekly declines in the market.

It still could be that the bounce is starting today, so far at least the volume on the SPY ETF is telling me so.  More on that a bit later today.

Here is another scenario for the SPY SPDR S&P 500 ETF which I probably should have thought of earlier.  It basically allows for the market to trade sideways into the end of this week instead of starting a break down today.

It would make sense for the market to do that since this Friday is options expiration and there is a tendency for the market to move into a low volatility state so that option holders do not make a huge killing and instead struggle with low volatility.  Apparently option expiration tends to have a slightly upward bias as well.

Also, after a second look at the symmetrical triangle I was talking about yesterday, I have this sense that it just seems too early to get a breakout going yet.  Usually this type of pattern is filled in more completely.

So if true, this is what it may look like by end of week:

If it plays out like this then it would keep the May 23, 2010 scenario alive where the market runs into that date instead of selling off into it.  That still is to me the most bearish possible scenario.  In fact it would probably be ideal that Friday is up right into the weekend and Friday may be the ideal time to short the market.

I really am speculating quite a bit about this May 23, 2010 date or close to that date.  It is an astro date that could have big significance in terms of turning points.  Perhaps I am focusing too much on that date? 

Well if everything works out perfectly, then we will see the market trade flat to higher into this Friday, then something big will happen this weekend, and it will slam the market down starting early next week and then just go relentlessly down all of next week.

There are only about 8 real trading days left until the end of the year if you exclude the days around Christmas.  So that means about 8 trading days to create the final YEARLY price bar close and then start the next one for 2010.

The market has powered up so fast and so persistently in 2009 that one would think people would take at least a few points of profit and capital gains.  For us to close the 2009 yearly price bar only a couple points from the yearly high seems improbable.  Just like on a daily price bar right before 4PM you see day traders exiting, I think we could see similar type price behavior going into end of this year.

In addition I should also tell you that I have noticed some OMINOUSLY bearish looking candlestick formations in recent days on the SPY ETF and DIA ETF and also the SP500.

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I close out my bearish short positions today in TZA and XLF.  I may go short again tomorrow, but for now it looks like this market is getting set for some kind of an upside bounce on the Fed decision.  It could flip either way at this point, but the decline so far has been really labored and slow.

On the 60 minute charts there are small falling wedge formations which shows a slowing of bearishness.  But clearly what ever comes out of the Fed tomorrow is going to move the markets big time regardless of what the technicals are saying right now.  I just have this feeling they are not going to take the punch bowl away yet tomorrow and just give the normal standard ‘we won’t raise rates any time soon’ sort of message which could send the market higher in a huge short covering rally.  Whether that short covering rally holds by end of day is another story.

The gold price is sort of telegraphing that right now blasting higher to new all time highs.  It is saying to me that the Fed tomorrow is going to pamper the markets again.

I can tell you plenty of reasons why the US Dollar should get a huge upside pop tomorrow, because it is sitting right near the apex of this huge falling wedge.  But falling wedges can fail too even though most of the time they are reliable.

Pretty much everything seems hinged on tomorrows tape action and it is probably prudent to be on the sidelines until a couple minutes before the close of market tomorrow because I think things will be very wild and up and down all over the place.  But a couple minutes before the close tomorrow should give the real indication of where we go near term and into next week.

The short term sell signal I was talking about yesterday seems to be a wrong signal.  Perhaps I was splitting hairs too much.  It is still early, but the market is powering higher in what appears to be a sign of strength over previous resistance that exists in the late May to early June time period.

So I have to respect what the market is saying at least as of right now and am going to change the short term signal to long again.  This market wants to move higher and this move may be faster than many expect. 

I would like to add either the SPY or the SSO (SP500 double long ETF) to the BestOnlineTrades Recommended list but I would rather wait for the first pullback from this rally before initiating.  I hate to chase it after almost 9 days straight up.

It is still going to be interesting to see what kind of volume we get on this breakout today and if price can hold the breakout at the top of the range.  So far this looks like a sign of strength early today but we will have to see how things look by end of day.

Anyway, to summarize, the broad market has invalidated my short term sell signal I had yesterday.  This market wants to power higher.  The nature of this rally should be quite persistent given the modest retracement that occurred from the May to end of June correction.

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This chart to the left is a side by side chart of the SPY ETF and the UUP ETF.  The UUP ETF represents the US Dollar Index.

I put this chart up because you can see the clear correlation between the recent bounce we had in the US Dollar Index and the correction we had in the broad market.

But since the US Dollar has started it’s decline again (vertical dotted line) we have seen the broad market power higher with  a lot of strength.

I mentioned in a previous post about the precarious situation the US dollar is in right now and could have dramatic implications for several different markets.

If you look at the chart to the left one could make the case that the UUP has made a small double bottom and could get a spike up bounce from those levels.  I don’t know if that will happen, but if it does then we could see the broad market pull back sharply for a short term period before resuming higher.  But the overall message in this chart is that the weaker the US Dollar gets, the stronger the broad market gets.

The S&P 500 SPDR ETF is sitting right now on crucial support.  There are a few ways to look at this retest and I have to tell you honestly I do not have a whole lot of confidence in either my bullish or bearish forecast.

If you put me up against the wall right now and forced me to give you an answer I would have to tell you that I believe we will break the lows perhaps on this upcoming Monday or tomorrow.  But in the same breath I will probably also want to tell you that volume is usually never wrong.  And a break of the November lows on significantly lighter volume could mean a very fast and violent quick reaction back to the upside faster than most think.

Here is the dilema I am having. On November 20th and 21st 2008, the SPY ETF made that two violent swing lows on 814 and 718 million shares respectively.  However our recent retest near those swing lows have been about half that volume.  That says to me that we do not have the energy to break through to the downside even though it looks like it wants to.

The problem is that the SPY ETF has not tested the actual swing low of the 21st yet and it is sort of hovering in a pocket right above the area trying to decide what to do.  I do not like the reaction we have seen so far off of this area.  I would much rather have seen a quick reaction that looked like it was hot to the touch.  In other words it would have been much better to see a wide price bar move that shows real demand is coming off of this support.

Instead we are seeing weak reaction and hovering right near support. Not a good sign. As you probably already know the Dow has already broken support but it was on also significantly lighter volume.  The nasdaq is the strongest right now but the volume was a bit heavy today on the downside, another bad sign.

So in summary the volume is saying that we are almost done with this decline and that support will hold. But the price reaction is saying we may bust through it.

The unbelievable part is that if we do bust through it there is a measurement from the triangle pattern that points to about 500. Or 50 for the SPY ETF. Not good.

Lets see what happens. We should know by Monday of next week I would think.