Tuesday, August 12, 2014

Short Term Price Logic on SPY

Click on Chart to Enlarge

This chart is a 15 min candlestick chart of SPY.  I am just following up here with the short term movements in SPY recently.  The last couple posts suggested that we would likely see SPY attempt a rebound given the short-term technical analysis and intermediate term extreme in put/call ratios and VIX.

So here we are a couple days into a rally and let's see what we may expect.  First off the rally off the recent low completely retraced the last wedging portion of the decline in far less time than the decline took to form.  That gives us a logical indication that the short-term psychology and trading algorithms turned bullish.

Next we now see that the decline off the peak of the initial thrust off the low, has been very small and has already taken as long as the rally from high to low.  So this is additional logical confirmation that the upward price action is still dominant and the downward moves are corrective on this short term analysis.

Based upon this, I would suggest that it is probable that we see a rally up above Monday;s high before this rally completes.  So at this point we have a price logic "set-up".  A very simple analysis and yet a powerful logical construct to apply to market action in order to gauge the dominant trend.  From this point for trading, I suggest having an objective indicator signal to give a trade entry and trade follow through as far as setting stops and moving stops.

Given the recent post about put/call ratios suggesting that the recent spike above 1.0 may be signs of a larger shift down, I think it would be wise to apply similar logic on any decline that rapidly retraces an upwards move.  If we see that type of action at a lower high than the recent all time highs, then it would offer a possible short position.

The last 3 daily sessions in SPY have occurred on lower volume.  That is arguably a sign of weakness.  And given the larger scale turn down off of divergences in the weekly MACD, etc, we should be keen to a potential sucker rally here.

I will track short-term moves over the next several sessions because of the possible longer term change in market character here and the potential to establish short or inverse positions on this rally.  As of the current time of writing, I would suggest that shorting on a break to a new corrective low may be a legitimate strategy here given the larger currents.  That type of play has generally not offered a good reward to risk ratio in this bull market, but with willingness to quickly adjust a stop toward breakeven it could offer a viable trade in my opinion.


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