Short Term SPY Pattern Analysis 9-9-15

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While the focus of trading is on objective signals or occurrences that lead to a profitable expectation based upon historical testing, the use of more qualitative patterns, is intriguing to many of us, and is certainly valid to some extent as a filtering process for trade selection.

Based upon the overlapping market action since the Aug 24th low, it seems very apparent that a correction/consolidation has been occurring rather than a trending move to the upside.  The simplicity of this should alert us to the probability that there will be a further move to the downside after the consolidation is complete.

From a "wave" perspective I would make a couple observations here.  The upward moves since the low have a generally shortening or contracting bias implying weakening.  It seems possible that a small complex correction abc-x-abc is completing either today or tomorrow.  Since the upward moves are contracting, it may be a rising wedge/triangle pattern abcde.

In either case, the bulk of the move is done, if not complete at this morning's high.  From the 15 minute MACD, it appears ideal for another push to a yet higher high later today or tomorrow before a top occurs.  That would also create a probable bearish divergence in the hourly stochastics and create a situation where all the times frames from 15 min to 240 minute stochastics are overbought.  On a short term pattern like this, that would seem to be an ideal conclusion.

Any move below Tuesday's low would seem to break the uptrend since August 24th and likely indicate at least a short term top and probable retest of the August 24th low.

If the pattern is a double correction abc-x-abc, we should expect a rapid move back below the 191.60 low from 9-4-15.  And that move should take less time than the last "c" wave takes in order to provide confirmation from the price logic standpoint that a new downtrend has begun.

So there are a number ways to play this if not already short.  Here are a couple ideas.

• Short on a cross of the 8 EMA below the 21 EMA on the 15 minute chart (stop above the highest point of the pattern.
• Use a sell stop to short on a rapid break of the recent "b" point.

My mind doesn't like to sell after a decline.  I prefer to sell as a top seems to be forming with bearish divergences, and use chart resistance or statistics in order to establish a stop level.  This method will often allow a quick movement of the stop down once there is an initial break or indicator action suggesting a top has occurred.

Trade Management Example:

-Short SPY at 198.00.  Place the stop at 203.00

-Exit half position at a limit of 195.50.  Move stop down to 200.50 (or lower).

-Then continue to manage the trade with a stop adjustment technique using an indicator or moving average channel.

-Exit the trade at the next 15 min MACD bullish divergence if not stopped out.