As Tony G mentioned in the comments Wednesday night, SPY has a bearish descending-triangle pattern on its chart. The pattern has been established over three weeks, so it looks pretty solid. Here is a 60-minute chart (click to enlarge):
(I find that hourly charts are the best for spotting emerging patterns.)
If you look at a TRIN chart over the same period, you will see that the last two Monday Massacre sell-offs were dramatically more intense than the first sell-off that began on August 11th. The TRIN takes into account not only the number of stocks advancing/declining, but also the volume.
I think that this increasing intensity is due to bulls having their mouses hovering over the sell buttons on their screens. Bulls with profits in this bear-market rally look like they are being very quick to lock them in by selling in when the market starts falling.
A couple of weeks ago, I got burned by trying to play a descending-triangle pattern on the USO. An oil inventory report was released and USO blew out of the pattern to the upside. I miss-played that set-up because USO was oversold, and the pattern was only about three days old.
SPY’s descending-triangle is very well-defined over a nice period of time. SPY is also overbought on a short-term basis, and a longer term basis. Good news in the form of the durable-goods number on Wednesday morning, failed to break SPY out of the pattern to the upside, so it looks like the large players have little interest in accumulating stocks, even on good news.
I like the set-up technically. I also like it fundamentally. The economy is clearly slowing. So is the global economy. And the credit crisis is actually getting worse judging by credit spreads, and more banks being added to the FDIC’s trouble list.
I think the big funds will likely be able to keep the market from breaking down as they bid underneath to keep their monthly numbers looking good. While they are not always successful at the end of a month, with light holiday volume, they should be able to do it this time.
So, I’m thinking that SPY doesn’t break $126 this week, but will probably do so early next week. And then SPY should quickly proceed to testing $125.
SPY has tested, and bounced off of, the support around $126 twice so far. The textbook says that the third time is usually the charm. So, I have taken a short position in the futures, and am hoping that the big funds can hold things up long enough Thursday for me to complete an all-in short deployment.
SPY’s old breakout area at $129 served as resistance Wednesday. So, our trading range is $126-$129. If any of this week’s remaining economic reports pushes SPY above $129, I will be shorting as I think it will likely prove to be a false breakout.
Keep in mind that the tape has not rolled over yet, as of Wednesday’s close, though the futures are down a couple of points as I write this late Wednesday night.
Thursday and Friday will be very interesting. On one hand, you will have the big funds bidding underneath in a low-volume environment. They usually win. But on the other hand, you have increasingly jittery bulls itching to get out alive. With at least a neutral news flow, I expect the big funds to win with SPY perhaps being range-bound between $127-$129 for the rest of the week.