Don't Ignore This Chart!

Three Indicators to Measure Oversold Conditions in SPY


The S&P 500 SPDR (SPY) is down sharply this morning and over the last six days. The ETF hit a new all time high less than two weeks ago and remains above its 200-day SMA, and its early June low. This suggests that the long-term trend remains up. Moreover, three indicators point to oversold conditions that could give way to a bounce.

The chart shows SPY falling around 5% the last six days. While we do not need any indicators to tell us the ETF is short-term oversold, I will show three to quantify conditions. The first indicator window shows RSI(5) moving below 20 for the first time since early June. The second window shows the Stochastic Oscillator (14,3) moving below 20 for the first time since early June.

The third indicator window shows S&P 500 %Above 20-day EMA (!GT20SPX) moving below 30% on Friday. This indicator will likely move below 20% if the market maintains its losses into the close today. %Above 20-day EMA was last below 20% in late May (green oval). This means we could see all three indicators in oversold territory by the close and this could pave the way for at least an oversold bounce.

At this point, playing for an oversold bounce is like catching a falling knife, kind of like on May 13th (red arrow). In addition, we have yet to see any signs of firmness with an indecisive candlestick. Notice that a spinning top formed on June 3rd and SPY gapped up the next day. Traders looking to catch an oversold bounce need to be nimble and have an exit strategy.


Choose a Strategy, Develop a Plan and Follow a Process

Arthur Hill, CMT

Chief Technical Strategist,

Author, Define the Trend and Trade the Trend

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Arthur Hill
About the author: , CMT, is the Chief Technical Strategist at 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
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