SPY Gaps Into Resistance, Forms Bearish Engulfing
The SPY gapped up into what looked like an exhaustion gap pattern and began its descent lower all day, completely engulfing the ‘hanging man’ candle that formed yesterday. Let’s take a quick look at this action.
It’s almost comical now to declare any sort of bearish technical (or fundamental) pattern because the market has completely ignored them – from confluence Fibonacci levels, negative breadth, volume, and momentum divergences, EMA resistance, etc. So take this as it is – a bearish ‘classical’ technical analysis signal.
On Wednesday’s action, price formed a “hanging man” candle (bearish) after forming a doji (reversal) the prior day. Shrugging that off, bulls gapped up the SPY (and stock market) this morning… but they met resistance immediately. With an hour to go before the close, a Bearish Engulfing pattern has formed, as bears have completely stripped away the range of yesterday. Closing beneath yesterday’s low would also trigger a ‘key reversal’ pattern (similar to the engulfing).
We’re also coming into resistance via the January highs and the 200 day SMA which is just above price.
I wanted to point this out to you as a quick update. Should the pattern hold, the first line of support would be the $87.50 level, which was the February highs and also the current 20 day EMA.
Corey Rosenbloom, CMT
Afraid to Trade.com
Follow Corey on Twitter: http://twitter.com/afraidtotrade
Hello Corey nice analysis but I don't understand what you mean that the market has been ignoring bearish technicals. The technicals that I have been seeing were far more bullish than bearish and the market has been very technical IMHO. Trendline breaks, ema crosses, multi-year supports, etc. etc. The 23 % retrace and February highs were the only real “hope” to halt the rally for the bears and they gave it a good try but the price action was too strong. The 200 ema, January highs, and the 38% fib retrace are formidable confluence zones of resistance so the market may have to consolidate and give it another go from a higher base. I don't know if I'll be at the LA Expo since I'll be in Vegas next week but hope to catch your presentation if I do.
Whether this is a/the reversal is yet to be seen, but those schooled in statistics recognize that “reversion to the mean” is a reality. This mornings high sure seemed like a last gasp high. We'll see!
Those key levels of resistence we just pushed up through are now going to be support. A break there will be telling.
Over the last three and a half days, note the bearish divergence between price and RSI, also mirrored by a divergent MACD.
Mini,
For me, I'm more of a 'fader-trader' and prefer range-bound conditions to runaway trends – I like to know where my risk points and targets are, and so my indicators are mostly tweaked to tell me that and perform poorly in run-away trend environments like this.
As such, I've seen overbought oscillator readings, divergences in momentum, volume, and breadth (internals), etc.
I called out the “Cradle Trade” (EMA crossover) which was bullish but generally we retest the moving average more – we've stayed extended above it. I'm not entirely bearish, I just want a comfortable pullback to work-off some of these overbought and divergence signals.
Let me know if you'll be able to make it to the LA Show! I love Las Vegas as well.
Bob,
Once again, trying call any sort of bearishness – even a gentle pullback for more than one day – was greatly mocked by the market (as of Friday mid-day – market had a strong open).
I've begun sending colleages annotated charts of all the bearish indicators (divergences, statistical overextension, etc) and then concluding “So given all this evidence, my suggestion is to buy aggressively!”
But honestly, the humor/sarcasm has been right while classic analysis has been wrong.
So strange.
Bob,
I hear you and I see it.
But I'm convinced the market doesn't see it 🙂
I've had a bearish perspective with respect to this bounce and openly doubt this rally has legs; contrarian veiw. The markets took such a major hit a bull rally now just seems premature. More time needs to pass. A bear rally makes more intuitive sense to me. It's hard to take expectation out of the trading equation. Often we see what we want to see. That can be a painful $$$ experience when trading.
I reviewed the RSI in a longer time frame… Since the most recent major reversal in March; only minor divergences and corrective price pull backs. The moving averages are holding and Friday's bounce mirrored a pattern. No break of the trend yet.
“mocked”, but learning from experience… 🙂
I've had a bearish perspective with respect to this bounce and openly doubt this rally has legs; contrarian veiw. The markets took such a major hit a bull rally now just seems premature. More time needs to pass. A bear rally makes more intuitive sense to me. It's hard to take expectation out of the trading equation. Often we see what we want to see. That can be a painful $$$ experience when trading.
I reviewed the RSI in a longer time frame… Since the most recent major reversal in March; only minor divergences and corrective price pull backs. The moving averages are holding and Friday's bounce mirrored a pattern. No break of the trend yet.
“mocked”, but learning from experience… 🙂