Possible SPY Setups

Earlier, I posted an analysis of the SPY using the weekly chart. I wanted to add to the analysis by looking at the SPY Daily, Hourly and 1 minute charts. Again, SPY tracks SPX, and though I generally analyze the index directly, the big volume activity of Thursday and Friday warrants a look at this ETF. It is widely held and studying it directly helps me to better understand the general market sentiment of participants.

I want to start with the Daily chart, and most of my comments will be brief.




Note that we are still within an upward channel that started in mid August. This channel is approximately 80 points wide and tends to oscillate between top and bottom trend lines every 12-15 days. Note that we have been overextended since Thanksgiving, having skipped a trip to the bottom line. With this in mind, unless we break the bottom trend line near 108 (boxed region) - we remain in an up channel. Having said that, the volume and magnitude of the price drops in the last couple of sessions should have everyone on guard. Look at the low volume that accompanied the drop on Thanksgiving. In fact, buyers edged out the sellers on that day - on very low volume. Clearly, the selling on this trip suggests a very different sentiment.

We have approximately 8-10 SPX handles to go to reach bottom. If we break this bottom channel, support will be tested at several key levels. I noted in my earlier blog that SPX 960 is a very reasonable target. If that plays out, we should drop a fib from 960 to the recent high and see what we get in terms of Fib levels. At to that what seems to be the volume driven support line and our target levels include:

• The 38% retrace at 104.60 (SPX 1040ish)


• The volume support line at 102.60 (SPX 1020ish)


• The 50% retrace at 101.22 (SPX 1010ish)


• The 62% retrace at 97.82 (SPX 980ish)

The most important level of the bunch is 101.22. This is the location of the 200p MA and if price action crosses below that line, we are back into bear market territory.

Focusing on the next 10 SPX handles, open the hourly chart.



This is a very, very ugly chart and one look suggests near free fall. I can not imagine buying this security. Look at it!

Anyway, I have tried something different with this chart by incorporating some shaded regions to help explain what I am thinking. First and foremost, there are three important levels of resistance on the chart. They are:

• Major Short at 113 (Representing the SPX 1130ish)


• Short at 111.60 (Representing the SPX at 1115ish)


• Short at 110.60 (Representing the SPX at 1110ish)

These lines are in place because I for one will look to add short positions at these levels - if they ever materialize.

I have also indicated the trend lines for recent price action. Note that the trend represents lower highs - as sellers are in control of the market right now and they decide how high the market will rise before dumping. There is no buyer evidence in the charts at all. So, the highers order trend line connects the high of the year with the first reaction high since the selling began. Note that this trend line has yet to be validated by a second reaction high (very scary!). The second trend line follows the price action from the first reaction high on Thursday through the hourly peaks on Friday. Note that the price action is falling further and further away from this line each hours (very scary again!). These trend lines are very important for the day trader as I will discuss them in this post.

Everyone is looking for a pullback Monday or Tuesday. I hope we get one, but frankly I am afraid we might not. For me, a pullback requires that price action breaks above that lower trend line and it must break above the 110.60 line. I created an orange shaded zone where I think a pullback might land. It occupies the space bounded by the trend lines and the two short lines. I would trade with caution in this zone as a break of the top line (labeled cover line) could signal a larger pullback. If we get into the pullback zone and fail to break 111.60 I would short again and double my shorts with a subsequent break below 110.60 after the failure.

Notice the green shaded areas. Any break into these areas might be a good reason to cover and wait for the next short opportunity. That opportunity is at the Major Short line near 113. I hope this all makes sense.

Now, the final detail is in the 1 minute chart:




This simple chart shows that we are in a strong down channel. I have confirmed that the top down trend line on the hourly (cover line) carries into the 1 minute chart. It serves as our cover trigger during the next couple of sessions. I have circled a natural spot to short, which is at the top of the yellow down channel. This circle also intersects with the 200p MA, and both the 50p and 20p MA are well below this moving average, which suggests we are heading lower. If we break out of this channel, I would consider covering any ES scalps.

Bottom line is that I have no reason to call for a significant pullback in the market util we at least touch down SPX 1080ish. I am watching the futures tonight to see if there is any indication of direction. We are up 5 handles on the S&P, but it is early.

Good luck out there!