SPY gapped down from trading range resistance and is currently near the mid point of the 5-week high-low range. This area could offer short-term support. The range low is 108.12, the range high is 112.38 and the mid point is 110.25. SPY closed at 110.18 on Thursday. At this point, I still think the cup is half full, not half empty. First, the medium-term trend is up. Second, SPY is trading near its October high, which could be resistance turning into support. Third, RSI finished at 50.24 and the 40-50 zone marked support in an uptrend. Fourth, seasonality remains bullish until yearend. Prior declines within the trading range were 1-2 days. Downside follow through and a convincing support break at 108 would show enough selling pressure to reconsider.
Today I am showing a 30-minute chart for SPY. The ETF hit resistance from the early December high and gapped down on Thursday. There was no rebound after the gap, but SPY did manage to firm around the 62% retracement and in the 10-Dec gap zone. If the cup is indeed half-full then we may see further firming today and perhaps a little rally next week. It is also worth noting that small-caps (IWM) held up well yesterday. While SPY and QQQQ broke below their 11-Dec lows, IWM held well above its 11-Dec low and showed relative strength.
On a trading note, buying upside breakouts and selling downside breaks produces whipsaws within a trading range. This is because the reversal breaks occur near the middle of the trading range. One of these breaks will ultimately hold and produce a good trade, but it is unclear how many whipsaws will precede a good trade. Success depends on keeping the whipsaws (losses) small so that the good trade makes up for these losses. The alternative to playing the breaks is to buy near support levels and sell near resistance levels. This requires one to anticipate a reversal before the actual move. Anticipating near support or resistance improves the risk-reward ratio and works well in a trading range, but fails during an extended move. With SPY firming at the 62% retracement, the ETF is at a potential support or reversal zone. It could be anticipation time again.
About the author:
Arthur Hill, CMT, is the Chief Technical Strategist at TrendInvestorPro.com. Focusing predominantly on US equities and ETFs, his systematic approach of identifying trend, finding signals within the trend, and setting key price levels has made him an esteemed market technician. Arthur has written articles for numerous financial publications including Barrons and Stocks & Commodities Magazine. In addition to his Chartered Market Technician (CMT) designation, he holds an MBA from the Cass Business School at City University in London.
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