Last week's three-day decline in the S&P 500 ETF (SPY) was the steepest 3-day decline since March, Despite two long red candlesticks and this 3.9% decline, I still consider the medium-term trend up. As long as the medium-term trend remains up, declines are viewed as corrections or pullbacks within a bigger uptrend. Perhaps more importantly, the ETF is already trading in a support zone from the prior consolidation (yellow area). Friday's close is pretty much in the middle of this consolidation.
10-period RSI became oversold for the first time since late October. At this point, many short-term mean-reversion systems are turning bullish. In an uptrend, mean reversion systems view short-term oversold situations as bullish. With the bigger trend up, the theory is that prices will revert to the mean after becoming oversold. 5-period RSI was oversold in early September, early October and late October. After the long red candlesticks and oversold conditions, SPY formed indecisive candlesticks to signal a short-term bottom. Note that the indecisive candlestick in late October occurred three days after the RSI became oversold.
The 60-minute chart is skewed after last week's sharp decline. The only item to take from this chart is broken support around 113.2 turning into resistance. Frankly, I would not be surprised to see short-term resistance a little lower - perhaps around 112.
10-period RSI became oversold for the first time since late October. At this point, many short-term mean-reversion systems are turning bullish. In an uptrend, mean reversion systems view short-term oversold situations as bullish. With the bigger trend up, the theory is that prices will revert to the mean after becoming oversold. 5-period RSI was oversold in early September, early October and late October. After the long red candlesticks and oversold conditions, SPY formed indecisive candlesticks to signal a short-term bottom. Note that the indecisive candlestick in late October occurred three days after the RSI became oversold.
The 60-minute chart is skewed after last week's sharp decline. The only item to take from this chart is broken support around 113.2 turning into resistance. Frankly, I would not be surprised to see short-term resistance a little lower - perhaps around 112.
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.
Learn More
