Action: Bands divided into 4 quantiles (1 for each standard deviation above and below the 20 EMA), Last four opens and closes were all in lowest quantile, which is below 1 std dev under the 20 EMA. Prices broke higher intraday, but could not hold/sustain that level.
RSI: 32.02 - Close to oversold
STO: 11.19 - Oversold
MACD: .008 - Momentum downward, about to cross 0 line. Dangerous
Technical Analysis: RSI and STO showing low levels, suggesting that on a short term basis, the bearish bias may be running out of fuel. MACD is about to pierce the zero line. This is extremely bearish last occurring in early May during the last significant correction. The daily 50 SMA is higher than price, and has turned from a positive slope to neutral. The daily 200 SMA is 136.77, which may become a magnetic target for pricing. The most noticeable warnings come from a break in two significant trendlines and an appearance in the lowest quantile of the Bollinger Bands, which both can be seen in the chart below. Daily movements into this realm are circled below and precede drops. Healthy bull runs upward do not make it into that lowest quantile.
Suggestion: As with back in April 2012, the market can make another push and probably will, finishing off the classic double top, but a significant drop is usually looming, and as back in May, when it comes, it does come quickly. There is a playable bump, but you will need to be defensive in buying and should sell a little before the predictable, probable top. For now, we have three fib lines to act as guidance, 140.4, 139.4, 138.4. While the .38 (140.4) is the most common line to bounce from, I think a bump (1-3 day tops) here will be minor and it would be wise to hold out for a better point, such as 139.4 if you are aggressive or 138.4 if you are more conservative.
Chart 1: SPY daily chart - Trendlines with lowest BB levels circled
For many of us who choose to trade ETF's, we realize there are many options or ETF vehicles that can used to trade a particular market. I tend to follow and trade the Standard and Poor 500, but that does not mean I am stuck with SPY as my only choice. The Russell 1000, 2000, and 3000 follow closely, but will lag or lead depending on the market. Certain sectors may outproduce another sector such as financials or energy. Additionally higher beta options or leveraged ETF's exist including inverse volatility and 2x or 3x products.
Personally, I swing trade through my Roth IRA. No taxes = no problems, right? Well, yes on the taxes, but... Laws state that IRA's cannot operate on margin, so you have to be a little creative. You can use options, but that adds whole new dynamics of the greek parameters and heavy time decay. I personally prefer the 3x leveraged ETF products, UPRO, TNA, SPXL, FAS as well as inverse volatility XIV for Bull, and for Bear I prefer SPXU, TZA, SPXS, FAZ. Notice I did not include VXX in that list. I personally feel it is broken and grossly underperforms.
At any rate when entering a long or short trade, simply comparing daily RSI, ordering your choices from highest to lowest, is a generally reliable method for picking the strongest performers.
Today for example:
TNA: 38 (least)
XIV: 45 (greatest)
If they market were to pull a 3-5 day rally, this should be the order of profitability (more or less) and that should seem plausible based on the most recent bull runs.
Now here is the thing: If the market does not cooperate, the opposite will be true. So, if you go Bull and the market goes Bear, you will more likely bear a greater loss than the other ETF's.
Current Price: 141.35
MACD @2.899 This week bear cross-over, sloping downward,
RSI @54.67 Falling from 70 which is a sell signal and signifies end of a bull run
STO @ 76.29 Just broke under 80 after two months above, lots of potential energy here for big drop.
20 week @ 140, last touched in July '12
50 week @ 134, last touched in May '12
200 week @ 113 Last touched in Oct '11
Upper @ 148
Mid @ 140
Lower @ 131.5
Action bouncing from upper towards mid. History: Price has not deflected on the mid BB line in previous 3 cycles over past year.
Analysis: For a healthy correction SPY should approach 132 in about 2-3 weeks. For Bulls, this IS the best case scenario. This would allow the trend to continue upward with the least amount of pullback / time. However, this will break the 3 year long standing trendline upwards which stands at 138-139.5, depending on the method you use to draw it and the time frame in which we hit it. Because this level holds an incredible amount of support (including the .50 fib line and 200 day sma), I cannot see piercing it without some retracement. However anything more than a small bump up sets up the more powerful and more dangerous downward correction.
Chart 1: If the bulls manage to push the levels back up to around 148 (which is not easy, but still possible), this will contract the Bollinger Band similar to what you can see in Chart 1 below (around May 2011) adding increased potential energy for a more powerful move downward. In practice this confuses investors (who hate being sidelined anyways) into thinking the pullback is over. This addition of bulls only serves to add to the downward surge, which is at this point virtually inevitable from a TA perspective. In a situation like this, a 20% correction from the final departure under the Mid BB could easily be expected from a historical basis.
Chart 2: There are several warnings that this correction will and must occur. The first is the VIX:VXV ratio. Anything over 0.95 is a warning. It has sustained that number and even spiked to 1.00 this past week. This is rare and worth noting. In the second chart below, you will see this accurately predicted the last 3 corrections. The reason this ratio is important, it tells us quantifiably investor sentiment short term vs mid term, suggesting that big money sees a need to pay a premium for short term insurance.
Chart 3: On our third chart is the $CPCE Equity Put to Call Index. Similar to above, this is a marker of investor fear. This however can lag by a week or maybe two and may not touch or pierce the top BB until the stronger part of the correction has already started and investors scramble to protect themselves.
As previously noted above weekly SPY RSI levels have touched 70 and are descending, STO levels resided above 80 for two months and now broken under that mark, and the MACD histogram has just broken below 0, and to state the obvious with regards to momentum, prices are weakening. Until the market proves otherwise, we simply are in a contraction. ** Reference Chart 1
Chart 4: In the fourth and last chart, you will see a bearish ascending wedge in which we approaching the tip. Breakouts most frequently occur downwards. This graph suggests that the very max the Bulls can keep up the charade is about 3-4 months. Additionally on this graph, you will see linearly descending MACD's tops similar to set-up in '07 and '08. You will also notice that the slope is nowhere near as negative as 5 years ago and we should not expect a similar disaster to the stock market.
Suggestion: Can you make money in longs during bear markets? Yes, but it is dangerous and you would perhaps do better to use the rips as a set up for shorts against the market. If our illustrious Fed chief, Ben Bernanke, had not installed QE infinity, I would have no reservations on fully advocating that strategy, but do keep in mind that you will be fighting the Fed. That too has also proven difficult in previous markets. You would not be considered a "bad trader" for sitting in cash until some resolve came to light.
Chart 1: SPY Weekly Chart w/ RSI, MACD and STO
Chart 2: $VIX/$VXV Weekly (Short vs Mid term Options)
Chart 3: Weekly $CPCE Put/Call Ratio
Chart 4: SPY Weekly - Rising Wedge, descending MACD tops