With a gap down and long red candlestick, the S&P 500 ETF (SPY) broke below the lower trendline of the Raff Regression Channel. This is the second long red candlestick (sharp decline) in two weeks. In fact, the channel break is starting to look similar to the mid January break down. RSI formed a slight bearish divergence in January and broke below 50 as SPY broke below support. RSI also formed a small bearish divergence over the last two weeks and closed at 48.77 on Tuesday as SPY tests support from last week's low. Combined with the overbought situation and extreme bullish sentiment registered with the CBOE Put/Call Ratio ($CPC) over the last two weeks, it looks like some sort of correction or consolidation is unfolding. This could retrace 38-62% of the prior advance with the first target around 114-115. Also notice that broken resistance confirms potential support in this area.
On the 60-minute chart, SPY failed to hold the triangle breakout and plunged below its prior low at 119 with a sharp decline. This is enough to reverse the short-term uptrend. After reaching its lowest level since February, RSI formed a bearish divergence and broke below 40 to turn short-term momentum bearish. SPY is already down around 2.8% from its high and short-term oversold. We could see some sort of short consolidation or even a bounce that retraces around 38% of the decline before the second shoe drops.
The Fed started its two day meeting on Tuesday and its policy statement is expected at 2:15 on Wednesday. So much for quiet trading ahead of the Fed announcement. Participants were ready to be sidelined ahead of the Fed, but the Goldman Sachs hearing and European debt crisis emboldened sellers and scared buyers. The combination created a vacuum under the market as stocks fell sharply. I do not think either problem is going to go away anytime soon.
Economic reports:
Wed - Apr 28 - 10:30AM - Crude Inventories
Wed - Apr 28 - 2:15PM - FOMC Policy Statement
Thu - Apr 29 - 8:30AM - Initial Claims
Fri - Apr 30 - 9:45AM - Chicago PMI
Fri - Apr 30 - 9:55AM - Michigan Sentiment
Charts of interest: ASEI, BSX, IBM, LAZ
This commentary and charts-of-interest are designed to stimulate thinking. This analysis is not a recommendation to buy, sell, hold or sell short any security (stock ETF or otherwise). We all need to think for ourselves when it comes to trading our own accounts. First, it is the only way to really learn. Second, we are the only ones responsible for our decisions. Think of these charts as food for further analysis. Before making a trade, it is important to have a plan. Plan the trade and trade the plan. Among other things, this includes setting a trigger level, a target area and a stop-loss level. It is also important to plan for three possible price movements: advance, decline or sideways. Have a plan for all three scenarios BEFORE making the trade. Consider possible holding times. And finally, look at overall market conditions and sector/industry performance.
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
