SPY: Overbought AND Bullish

Notice how SPY reversed soon after recording new reaction highs in September and October. These short-term reversals were confirmed when the Stochastic Oscillator moved below 80. The current swing remains up, but the next swing will either be down or sideways. It is just a question of when. Timing is everything in this business.

I am using the 30-minute charts for short-term timing. SPY broke resistance and started an uptrend on November 4th. Even though trading has been flat the last three days, the up trend has yet to reverse. SPY established support at 110.5 with this 3-day consolidation. I consider this minor support because it formed with a short consolidation, not with reaction lows that formed after pullbacks. There was a minor support break at 109 last week, but this did not result in a trend reversal (orange area). I do not want to set key support too tight when the medium-term trend is up. Key support remains at 109. Look for a break below this level AND a CCI break below -100 to fully reverse the short-term uptrend.


I wrote about the bullish seasonals in Wednesday's market message. Since 1950, the 6-month period from November to April is the best six months of the year. The Stock Trader's Almanac also notes that the Dow advanced the week before Thanksgiving 13 of the last 15 years. Furthermore, Jeffrey Saut of Raymond James notes that the Dow has been up from November 11th to December 5th each of the last 12 years. The January effect comes into play sometime in December as small-caps outperform large-caps. We also have under-invested portfolio managers looking for pullbacks to buy and end-of-year window dressing. All in all, there are a lot of bullish factors coming into play over the next few weeks. At the very least, short-term declines could be limited until January.