Tuesday, August 23, 2011

SPY Update

Click on Chart to Enlarge

Building upon the labeling I have been using for these patterns in the S&P 500 for the last several months, it seems likely that we currently are correcting the first phase down of a new larger downward market phase.

Based on the daily stochastics and general average time cycles, it seems likely that the market is due to consolidate or retrace and give stochastics some time to cycle back upward before continuation of the downward trend. There is a large unfilled gap down from last week around 120.00 on SPY again which I think is likely to be filled in the coming few weeks.

Based on studies of past waterfall declines I would expect a "flat" type pattern to occur here where the market rallies back up to the highs of the initial thrust off the bottom before resuming downward trending. However, we may see a triangle form in this position also. In either case I think this current move up that started today will probably get close to, or fill, that gap down from last week.

The dark red line on the chart I would think to be a resistance line should the market rally back to that area. I would definitely initiate short trades there if we get some reversal after rallying back there.

I am using the Oct 2008 waterfall decline as a template for what will happen here in this environment. In that case after a sharp rally attempt like today, the market broke back below what would correspond to yesterday's low, and retested the very bottom of the waterfall decline. Because of this, I will be quick to move the stop up on this trade with further upside, and if stopped out be willing to look at another entry a few days after that.

There has been a strong tendency for stocks to rise into option expiration the last couple years. I think a good expectation is for the market to hold the current August low, and then to cycle back up a bit into expiration next month.

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