Since I began this series on Wednesday night, the S&P 500 futures have dropped 36 points. So far, I have the correct analysis, and things still look bearish to me though there are some potentially bullish signs. Here is what SPY looks like now (click to enlarge):
SPY has fallen decisively out of its symmetrical triangle (bounded by the purple lines). SPY also has a new, steeper downtrend line (black) that has been in force for four days now. SPY needs to break above that black line quickly, and fight it’s way at least back up to the upper purple line. Otherwise, the bottom-fishing bulls may sell in a panic.
On the bright side, the SPY candlestick pattern is close to a bullish inverted hammer or possibly a bullish belt hold. It doesn’t quite fit either, so if you have an opinion, please post in the comments.
Previously, I had used the QQQQ’s more bearish descending triangle pattern to predict that SPY would fall out of its triangle, so let’s see what the Q’s are doing:
The Q’s broke way below the lower purple line in the morning, but then fought back above it and held there at the close. Not bad, however the support around 29.40 has been badly eroded, and the Q’s now have the same black downtrend line that SPY does.
Here is the IWM chart:
Like SPY, IWM has decisively fallen out of its symmetrical triangle. More ominous though is that it was not able to even tag its new black downtrend line. The small-cap stocks of the IWM are where traders go when they feel extra bullish, so this is not a good sign.
Here is the XLF chart:
The XLF fell out of its triangle a few days ago, and made a new closing low on Friday. However, it was able to peak above its black downtrend line, and does indeed have a bullish inverted hammer candlestick pattern. So, it does look like it could bounce on Monday.
Friday’s reversal was very impressive. However, SPY has made three impressive intra-day reversals in a row on Wednesday, Thursday, and Friday, and still the feisty bulls have lost ground. Will they keep fighting?
Friday’s reversal reminded me of the action when the initial low was made on Friday, October 10th. There was some selling before the close on the 10th, just like we had on the 24th. However, the selling before the close this Friday was more intense and began earlier. So, that looks more bearish to me, but I will be watching the action of the futures tonight for an indication.
On the Sunday following October 10th, the futures gapped up a little bit and trended higher all night before the giant rally on the 13th. If I see that again tonight, then I will conclude that we have a bullish hammer reversal going and will take profits on my short futures position. I will then look to remount at the peak of that potential rally which may come after the Fed announcement on Wednesday.
Other bullish factors are:
- The big funds will do their best to prop things up as we approach the end of the month.
- The market is not overbought even after all the buying on Friday.
- The Fed will probably cut rates again.
If I had to trade right now, and couldn’t trade again for several days, I would stay short for a test of the 2002 lows.
LATE ADDITION: SPY’s rally on Friday afternoon can be seen as a failed thow-back attempt. Such back-testing of a breakout is common, whether prices break to the upside or the downside of the pattern. Because of this, Monday is a crucial day for SPY. Also, to confirm a breakout, many traders look for a 3% move. To regain its triangle, SPY would have had to close above 91 on Friday, but could only manage 87. So, the breakdown is confirmed by the 3% rule. Traders also like to see prices trade below the pattern for three days for confirmation, and while SPY has not done that yet, XLF has. And since the financial system is at the heart of our problems, XLF’s descent as a very bad sign for the market.