Charts-SPY
This is a chart of the S&P 500 ETF {SPY}. We use this as a proxy for the overall market because this is an easy way that investors can trade the index. First, there's a lot going on in this chart so you can double click on it to make it larger. The market despite Monday's sell-off rebounded to where it traded higher on the week! The question of course is what happens next. The reality is that nobody knows exactly. We can though derive some clues as to what might happen by how the markets react to different price levels going forward.
There is an old investment maxim that "price has memory". In that regard notice that last week stocks went through and touched several older levels of support/consolidation going back to late spring 2014. Markets tried to rally on Tuesday but instead ran into an onslaught of mutual fund selling in the last 45 minutes of the day. Markets at least didn't make a new low on that day and then rallied the rest of the week. Those that follow money flows believe that a key tell for future direction will be how stocks respond to this low. Many would look for a retest of that level in the coming days/weeks. If that occurs then the clues investors will meet to be attuned to how the markets react to this test. A market that breaks decisively to new lows would indicate to many that we are not done on the downside. However, a market that tests and holds those previous lows would indicate a higher probability that a longer term low has been put in place. Please note there is no law that says we must head back down. If this plays out like declines of the past few years then we may have already formed a "V" shaped bottom. I talked about this on a post directly below on Saturday. Those prior declines found bottoms almost immediately and then rallied to new highs. Next I'll take a stab at why probability suggests that won't be the case this time.
Stocks may or may not retest our recent lows but the reason that probability suggests we won't follow through the same pattern from prior declines and rally to new highs can be found in the yellow shaded area in the chart above. Unlike the previous recoveries, this time we have an almost an entire year's worth of trapped longs. That is all the folks that bought SPY in and above the yellow shaded area above are underwater on their purchases. That same reasoning can be found in the charts of many other stocks and ETFs. Theory suggests that these investors in losing trades are more likely to be motivated sellers as price approaches their breakeven prices. Thus, there is a sizable area of resistance that needs to be eaten into before this ETF ought to be able to resume its advance. Theory suggests and past trading indicates that this often takes time to work through.
Now the reality is that stocks can confound any analysis and do what they want and a market that rallies now to new highs would be indicative of a much more powerful bull move. Theory suggests though that we need to consolidate at some level now below the range shaded in yellow or at the least work our way back into that zone and consolidate. That may take weeks or months and is anybody's guess in regards to time. Just trying to tell you what the tea leaves are saying to me. I'll let you know how this resolves itself going forward.
Chart of SPY is from Stockcharts.com.
*Long ETFs related to the S&P 500 in client and personal accounts. Please note these positions can change at any time without notice to our readers.
There is an old investment maxim that "price has memory". In that regard notice that last week stocks went through and touched several older levels of support/consolidation going back to late spring 2014. Markets tried to rally on Tuesday but instead ran into an onslaught of mutual fund selling in the last 45 minutes of the day. Markets at least didn't make a new low on that day and then rallied the rest of the week. Those that follow money flows believe that a key tell for future direction will be how stocks respond to this low. Many would look for a retest of that level in the coming days/weeks. If that occurs then the clues investors will meet to be attuned to how the markets react to this test. A market that breaks decisively to new lows would indicate to many that we are not done on the downside. However, a market that tests and holds those previous lows would indicate a higher probability that a longer term low has been put in place. Please note there is no law that says we must head back down. If this plays out like declines of the past few years then we may have already formed a "V" shaped bottom. I talked about this on a post directly below on Saturday. Those prior declines found bottoms almost immediately and then rallied to new highs. Next I'll take a stab at why probability suggests that won't be the case this time.
Stocks may or may not retest our recent lows but the reason that probability suggests we won't follow through the same pattern from prior declines and rally to new highs can be found in the yellow shaded area in the chart above. Unlike the previous recoveries, this time we have an almost an entire year's worth of trapped longs. That is all the folks that bought SPY in and above the yellow shaded area above are underwater on their purchases. That same reasoning can be found in the charts of many other stocks and ETFs. Theory suggests that these investors in losing trades are more likely to be motivated sellers as price approaches their breakeven prices. Thus, there is a sizable area of resistance that needs to be eaten into before this ETF ought to be able to resume its advance. Theory suggests and past trading indicates that this often takes time to work through.
Now the reality is that stocks can confound any analysis and do what they want and a market that rallies now to new highs would be indicative of a much more powerful bull move. Theory suggests though that we need to consolidate at some level now below the range shaded in yellow or at the least work our way back into that zone and consolidate. That may take weeks or months and is anybody's guess in regards to time. Just trying to tell you what the tea leaves are saying to me. I'll let you know how this resolves itself going forward.
Chart of SPY is from Stockcharts.com.
posted by CR English at 8:17 AM
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