SPY plunged below its late November low on Thursday and firmed on Friday with a reversal candlestick. Even though it is not a picture perfect hammer, the essence of the pattern is clearly there. SPY opened at 106.56, plunged below 105 intraday and recovered to close at 106.66, .10 above the open. It looks like Thursday was a panic selling day and Friday was a climax reversal day. A lot of technicians, perhaps too many, have spotted this setup. Also notice that the decline occurred with three legs: decline, bounce, decline. Although much deeper, the recent four week decline looks similar to the three leg decline in September. The key to a sustainable rally is strong follow through with good volume and breadth.
On the 60-minute chart, SPY bounced off the lower boundary of a falling price channel. I drew the upper trendline first and then the lower trendline parallel. Friday's afternoon bounce was impressive, but this is still an oversold bounce within a downtrend. SPY remains within the falling channel. I am marking a resistance zone around 108-109 from broken support and the 38% retracement. I would like to judge volume, breadth and sector participation before considering this bounce as anything more than just an oversold bounce. I would expect a weak bounce to fail around 108-109 and then another test of Friday's lows. It is also worth noting that QQQQ showed relative strength the last few days. The indicator window shows the price relative for QQQQ:SPY (black) and IWM:SPY (green). Notice the QQQQ:SPY price relative bottomed on Tuesday and moved higher the last three days.
Earnings reports have been quite good, which is not surprising considering strong GDP growth in the 4th quarter. A lot of good news was already priced into the market after the sharp advance from early November to early January. The combination of profit taking and European debt fears pushed SPY and DIA below support from the late November lows. Was this an overshoot or the start of an extended decline (correction or otherwise)? At this point, selling pressure is selling pressure, no matter what the reason. Even though SPY remains above its last reaction low (early November), the decline over the last four weeks did some serious technical damage that will require some healing.
Looking ahead, earnings season remains in full gear with some 300 companies scheduled to report. Economically, the docket is pretty light the first three days. Initial Claims will be reported on Thursday before the open. Retail sales will be the biggie on Thursday, also before the open (8:30AM). Once again, it looks like Thursday could be the big day of week, especially for retail and the consumer discretionary sector. Michigan Sentiment closes out the week on Friday around 10AM.
Earnings reports have been quite good, which is not surprising considering strong GDP growth in the 4th quarter. A lot of good news was already priced into the market after the sharp advance from early November to early January. The combination of profit taking and European debt fears pushed SPY and DIA below support from the late November lows. Was this an overshoot or the start of an extended decline (correction or otherwise)? At this point, selling pressure is selling pressure, no matter what the reason. Even though SPY remains above its last reaction low (early November), the decline over the last four weeks did some serious technical damage that will require some healing.
Looking ahead, earnings season remains in full gear with some 300 companies scheduled to report. Economically, the docket is pretty light the first three days. Initial Claims will be reported on Thursday before the open. Retail sales will be the biggie on Thursday, also before the open (8:30AM). Once again, it looks like Thursday could be the big day of week, especially for retail and the consumer discretionary sector. Michigan Sentiment closes out the week on Friday around 10AM.
About the author:
Arthur Hill, CMT, is the Chief Technical Strategist at TrendInvestorPro.com. Focusing predominantly on US equities and ETFs, his systematic approach of identifying trend, finding signals within the trend, and setting key price levels has made him an esteemed market technician. Arthur has written articles for numerous financial publications including Barrons and Stocks & Commodities Magazine. In addition to his Chartered Market Technician (CMT) designation, he holds an MBA from the Cass Business School at City University in London.
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