SPY started the day strong, but finished weak and closed with a modest loss. Even though there was no follow through on Monday, the ETF remains short-term oversold and ripe for a bounce or consolidation. Overall, the 3-4 week pattern looks like a zigzag decline with three legs (decline, bounce, decline). This is similar to what we saw in September (yellow area). Notice that this zigzag reversed on the proverbial dime. There are, however, some differences with the current decline. For starters, the decline over the last 3-4 weeks was much deeper and reversed the medium-term uptrend. This means any bounce from here would be considered an oversold bounce within a bigger downtrend. Oversold bounces can be as short as a few days or as long as a few weeks. At this point, I think an oversold bounce would last a few days, not a few weeks.
On the 60-minute chart, SPY remains in a falling price channel. The ETF bounced off the lower trendline on Friday with a move to around 107. This bounce did not last long as the ETF pulled back below 106 on Monday. Doing a little microanalysis, Monday's decline retraced 50-62% of Friday's bounce. This is the area to watch for support and a short-term reversal that could carry towards the resistance zone around 108-109. I continue to be intrigued with relative strength from the Nasdaq 100 ETF (QQQQ) over the last four days. Notice that the price relative (QQQQ:SPY ratio) bottomed last Tuesday and moved higher. Should the market get an oversold bounce, then I would expect big techs to lead the way higher.
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 week, especially for retail and the consumer discretionary sector. Michigan Sentiment closes out the week on Friday around 10AM.
Below are a few charts of interest
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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