A Momentum Peek Inside the January SPY Decline

Feb 4, 2010: 11:17 AM CST

It’s often helpful to step ‘inside’ the price action, particularly if you are a swing trader and especially if you are an intraday trader to see the structure and formation of price and how it compares to momentum.

Let’s take a look at the 10min SPY chart and note the current levels to watch going forward.


(Click for full-size chart)

Starting with the January 20th initial ‘plunge,’ I drew a simple Fibonacci grid to connect the January 29th low to find the 38.2%, 50%, and 61.8% retracements.

I showed this same grid in my recent “How the Three Key Market Internals Preceded the Rally” post.

Buyers were only able to take price up in retracement fashion to the 38.2% level at $110.40 before resuming the selling pressure we are seeing this morning (in an impulsive method).

A simple glance at the chart above tells us that the $107.00 and $107.50 price in the SPY (1,070 in the SP500) is the critical line in the sand between bulls and bears.

Any break – later today perhaps – of this level would forecast lower prices as sellers raided the stop-losses (of buyers) under the critical level and short-sellers put on new positions, creating a ‘positive feedback’ move.

For now, it can (potentially) hold as a support level, at least temporarily.

The other area to watch is the 38.2% retracement at $110.40 which seems far overhead now.  A break of this level would tip the odds back to the bullish side, but as of this posting, sellers are in control though buyers will try to defend support here.

Momentum Divergences (3/10 Oscillator)

On a separate educational note, I wanted to highlight the divergences that preceded reversals, particularly the lengthy divergence that occurred at the January 29th low that preceded the sharp rally.

The rally up into the 38.2% level was accompanied by a negative divergence into resistance – a great place to short and play for a move lower with a tight stop above resistance – that trade set-up was successful.

We’re clearly not showing a divergence now, but a new momentum low, which tends to favor lower prices yet to come (as momentum to the downside is said to be accelerating).

Study these divergences closely for reference.

For now, continue watching the precarious $107.50 level as the key for what to expect – potential support bounce… or a breakthrough leading to lower prices still yet to come.

Corey Rosenbloom, CMT
Afraid to Trade.com

Follow Corey on Twitter:  http://twitter.com/afraidtotrade

6 Comments

6 Responses to “A Momentum Peek Inside the January SPY Decline”

  1. terlyn Says:

    Did you see a Wyckoff sign of strength this morning? I thought I did.

  2. Corey Rosenbloom, CMT Says:

    Hey Terry!

    Good call! We need to keep monitoring this because we're either going to form a rounded reversal off the key support level (we're slightly beneath it now) which could be forecast by the Wyckoff new TICK high or it will be a relentless trend day down. The Wyckoff strength was followed almost immediately by a new TICK low which weakens the signal.

  3. terlyn Says:

    Ok, that really threw me off. Thanks!

  4. terlyn Says:

    Did you see a Wyckoff sign of strength this morning? I thought I did.

  5. Corey Rosenbloom, CMT Says:

    Hey Terry!

    Good call! We need to keep monitoring this because we're either going to form a rounded reversal off the key support level (we're slightly beneath it now) which could be forecast by the Wyckoff new TICK high or it will be a relentless trend day down. The Wyckoff strength was followed almost immediately by a new TICK low which weakens the signal.

  6. terlyn Says:

    Ok, that really threw me off. Thanks!